Well I’m back from holidays and it seems none of the questions I was hoping would be clearly answered by now have been answered in a clear manner.
As I headed off for my holidays (I went to exotic Winnipeg this year. If you’ve never been there, you should try it!) I was hoping that by early fall we would be able to see whatever the direct impact of the end of the Canadian Wheat Board’s monopoly would be on prairie grain prices.
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Actually, that’s a lie. By early August, when I was leaving the office, I’d been covering the wild market rally induced by the massive U.S. Midwest drought and had already reported on a few of the unusual market dynamics that it had created. I knew the prairie market waters were going to be so muddy by early September that it would be hard to tell specifically what was CWB market impact and what was drought and rally impact.
It was already clear before August 1, when the CWB monopoly ended, that market dynamics were in flux and in a uniquely interesting time as certain crops were devastated (corn and soybeans in the U.S.) while others were going to turn out well (spring wheat, canola in Canada). So various spreads were going to end up WAY out of their usual kilter as the market found ways of covering the mismatch between supplies and demand.
So what really has been the impact of the end of the CWB monopoly on prairie grain prices? That’s what I’m asking this week as I call around analysts and traders. Getting some interesting responses, but everyone notes the difficulty of separating the CWB impact from the drought impact, so it’s really mostly educated guesses.
Such is the messiness of reality. We are hardly ever given a sanitized, clean laboratory in which to try out our real-world experiments. We have to work with whatever we’ve got today. So instead of working on a sterile white table inside a quiet and access-controlled lab, we’re trying out our post-CWB experiment on the equivalent of a table at the mall food court, with other people’s ketchup smears and the bacteria from the rags the cleaning staff use to “clean” the tables combining with our own kids’ French fry and burger-throwing efforts to create the most non-sterile environment on the Lord God’s earth.
Well, you work with what you’ve got. So we’ll chatter about this a bunch, but instead of clear answers we’ll have to wait a couple of years until we get a “normal” year to look at. And that’s all I’ve got to say, except I wanted to share a couple of charts with you that I find interesting and are a big story now.
These show the price spread between the three biggest wheat futures contracts in North America. They effectively show the protein premium value, because the Chicago contract is for soft red winter wheat that is assumed to have low protein, the Kansas City contract is for hard red winter wheat that has medium protein, and the Minneapolis contract has high protein and most closely resembles what Canadian prairie farmers grow. Usually there’s a nice, fat premium for hard red spring wheat because breadmakers value it highly. This year that premium has mostly disappeared, as the Canadian prairies and U.S. Great Plains have produced a good, high protein crop, and the U.S. Midwest and HRWW zone has been devastated by drought.
In the first chart, notice how the spread between the black line on top has been chased away by the other two lines. That’s the impact of the drought.
In the second, which shows relative price increases, notice how the rally in spring wheat futures pales beside the gains in SRW and HRW. Spring wheat’s just gotten about half of the rally in winter wheat. Would have been a nice year in which to have grown nothing but winter wheat, because you aren’t being rewarded for growing the other stuff.
