I’ll address several issues in this week’s column, from Saskatchewan crop yields to the value of the Canadian dollar to China’s changing support for domestic wheat producers.
The biggest market mover last week was the Canadian dollar’s decline to trade just below US78 cents.
Only last month, most Canadian currency analysts predicted the loonie would be trading above 80 cents at the end of the year, and one commercial bank, ScotiaBank, expected an 84 cent dollar early in 2018.
The idea was that the Bank of Canada would continue raising interest rates to keep control of inflation in a hot economy, where Canada led the G7 in the first half of the year.
However, the latest economic indicators show the economy might be cooling off more than expected in the second half, and so an aggressive program of interest rate increases is less likely.
As well, the North American Free Trade talks are going poorly, adding more uncertainty to Canada’s economy.
Also, the American dollar is rising as the market hopes U.S. politicians can get their act together enough to pass massive budget cuts.
The rapid reversal of thinking on the direction of the loonie might have heads shaking, but it is not unusual, as a CIBC currency analyst said in a note Oct 30.
“Currencies have a mind of their own, often moving with little regard to model predictions, economic theory or common sense,” Benjamin Tal wrote.
Tal and colleagues at CIBC see the loonie hitting 75 cents in the first quarter of 2018.
If true, that would help support Canadian exports of grain and meat and help lift crop prices here, relative to U.S. prices.
Last week’s Saskatchewan crop report provided the department’s estimate of crop yields. Its assessments for durum, spring wheat and barley were quite a bit higher than Statistics Canada’s official numbers.
There was little market reaction, likely because traders would prefer to wait for the official update from Statistics Canada, which is due Dec. 6.
The biggest variance was in durum, where Saskatchewan Agriculture pegged the yield in the province at 36 bushels per acre compared to Statistics Canada’s 29.6 bu.
Durum is grown in southern areas where drought was a major problem this summer, and so a lower yield was expected.
While better than Statistics Canada’s estimate, the Saskatchewan Agriculture forecast is still short of the previous four year average of 42.5 bu. per acre.
If Saskatchewan Agriculture is correct, it would add 700,000 tonnes to the total production, pushing it up to about five million tonnes.
The good thing is that the quality of this year’s crop is much better than last year so it should be easier to sell.
The cash price for No. 1 durum 13 percent protein in southeastern Saskatchewan according to PDQinfo.com Oct. 30 was $7.27 per bushel, giving it a premium over No. 1 spring wheat of only 68 cents.
Saskatchewan Agriculture’s forecast for spring wheat yield is 43 bu. per acre, up from Statistics Canada’s 39.4 bu. That had little price impact, given that the market is already weighed down by huge world stocks.
Saskatchewan Agriculture forecast barley at 63 bu. per acre, up from Statistics Canada’s 57.1 bu.
The province’s canola yield number was the same as Statistics Canada at 34 bu. per acre.
We’ve written a few times in the past year about the massive shift in agricultural policy underway in China.
Last week it made another move on its path toward a more market-oriented grain sector.
It lowered its support price for wheat grown in 2018. It has already eliminated the support price for corn, cotton and rapeseed. The goal is to bring crop prices in line with international markets and reduce corn, wheat and rice production. It also wants to increase soybean production to limit its imports of the oilseed.
The previous high support levels for the grain led to giant government-owned stockpiles that are deteriorating in quality as the years pass.
Beijing last month announced a huge increase in ethanol production to use up these stocks. It is also encouraging livestock production to move from urban areas to the northeast, which is the centre of corn and soybean production.
The wheat support level was reduced by only 2.5 percent so likely won’t have much impact, even when farmers make seeding decisions for the winter crop seeded in the fall of 2018.
The story is different in corn. With no support level, the price has fallen a lot and acreage is down. The corn price in March was 20 percent below the floor price in 2016, according to the blog site DimSums. In 2017 area fell 3.4 percent from the previous year.
There is no talk yet of the government eliminating the support price for wheat as it has done for corn.
The government is closely watching the impact of lower corn prices on farm income and rural political stability. It provides direct farm income support and individual states support crop prices.
Another factor to note in China’s wheat market is the challenge to Beijing’s wheat support that the U.S. has launched under the World Trade Organization.
It will likely take several years for the trade challenge and domestic policy reforms to fully play out, but somewhere down the road there might be potential for increased wheat and corn exports to China.