There are three races to the bottom going on right now, two of which are really bad for crop prices. One could be good, as long as Canadian farmers don’t get caught up in it.
One is the cataclysmic collapse in stock market prices. That’s sucking confidence out of the world’s economies, investors, consumers. It’s also sucking away the confidence that there’s going to continue to be big, booming demand for commodities of all sorts for the next few years.
That’s causing the second race to the bottom that you can see on all the commodity price charts. They’re going the opposite way of upwards, in a gradual grind down. Even though everyone says “people need to eat” when they’re justifying why crop prices should be stronger than other commodity prices, people don’t need to eat as much as when they felt rich, and if people don’t have money or credit, it doesn’t matter how hungry they get.
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Worrisome drop in grain prices
Prices had been softening for most of the previous month, but heading into the Labour Day long weekend, the price drops were startling.
That lack of money and credit is leading to the third race to the bottom, the one that may help – maybe in a big way – prairie farmers. Around the world, especially in countries with primitive financial systems, farmers are having trouble paying for essential production tools – such as fertilizer. The one surefire way to slash your crop’s yield potential is to put on less fertilizer than you know it needs. Every farmer knows that. That’s why most would never do it lightly. But if you’re facing higher interest charges on a line of credit or loan from a bank or fertilizer supplier, or if your fertilizer supplier can’t get credit from its bank, you may not have the choice. Less fertilizer, applied all around the world, would mean smaller crops in a few months in the southern hemisphere and less a year from now in the north.
That obviously would be better for prairie farmers than there being more in competitors’ hands. So long as they can still afford to put on the fertilizer they need for the spring crop, prairie farmers could produce another big crop in a world that’s a lot shorter of grain than it is today.
But whether that race to the bottom for production prospects will speed up and be enough to counteract the galloping confidence and demand destruction happening in the stock and commodity price markets today is anyone’s guess. As commodities guru Jim Rogers tell us, at some point underinvestment in commodity production – in this case crop production – leads to a deficit, and even in bad times prices can rapidly rise as buyers’ fear of not having any supply trumps their general fear of spending money. Let’s hope for prairie farmers this phenomenon occurs before they have to make their own decisions about how much to invest in their next crop.
