Unpredictability makes hedging difficult for producers

There are some things you can count on in the crop and meat markets:

  • Crops are volatile but rise from spring toward August and then sell off as weather worries arise and then dissipate.
  • Pork prices rise into midsummer as barbecuers work their grills, and then sell off.

Except when those things don’t happen, like now.

“This is a very early seasonal break,” Ken Ball, a broker with P.I. Financial, told me June 18.

“A lot of people got caught flat-footed.”

These are tempestuous times in the ag markets with an unusual degree of uncertainty.

Of course, there’s always the usual preoccupation with the weather, which has a major impact on crop production in summer, and consumer demand, which has a major impact on pork consumption during barbecuing season.

However, right now the markets are also twitching and palpitating with the impact of U.S. President Donald Trump’s trade wars.

U.S. crop futures have sold off dramatically since late May with Chicago corn dropping almost 50 cents per bushel on the nearby contract to slightly more than $3.50.

Chicago lean hog futures have been doing what they’re supposed to do so far, but there is great anxiety in the U.S. pork and hog industries about the impact of Mexican tariffs on U.S. pork this summer, especially if they increase to 20 percent (as planned) in July.

Hedging isn’t supposed to be about speculation; rather, predictable patterns tend to allow many farmers and others to rely upon seasonal cycles to provide trigger times for pricing decisions. When something is relatively predictable, it seems reasonable to count upon it rather than a gamble.

Trump has unleashed some dark spirits into the markets, and it’s impossible to predict what it will all mean for the real-world price of crops and meat. Will spreads appear or widen between U.S., Canadian and offshore prices as trade war implications develop?

Do Mexican and Chinese tariffs on U.S. pork provide a premium or improvement to Canadian cash prices?

Canadian wheat growers, which include almost all prairie farmers, are now facing a separate hedging challenge: the discovery of genetically modified wheat on the edge of a single field in Alberta. Japan and South Korea had suspended imports of Canadian wheat as of June 18.

What impact will that have on western Canadian prices? How will it affect the basis between Minneapolis spring wheat futures and prairie elevator prices?

How this affects existing hedges will take some time to tell. How this affects pricing decisions going forward is going to be a head scratcher.

However, it seems Trump has added a lot to the usual drama of the summer markets, and hedgers have even more to consider than usual.

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