Enjoy this rally, grain farmers, you deserve it.
The massive crop market rally that began in late summer will probably last at least until midsummer, and maybe all the way through the 2021-22 crop year.
South American crops are struggling with the cancer of La Nina, many of the world’s crop stockpiles are falling, China is steadily consuming the world’s excess supplies, and even great crops next summer probably won’t alleviate the growing tightness.
On top of that, there’s a general commodity market rally underway. Remember what happened last time?
This market windfall will be a godsend for thousands of western Canadian farmers who need a break from the relentless low prices that have smothered us since the ending of the last commodity bull market in 2014.
Those prices have hurt everybody living off crop sales, but especially those cursed by appalling harvest weather in 2018 and 2019.
This next year could be the relief farmers need to repair the damage done to them by the markets and the weather.
So, what will farmers do with this lucky turn?
Will they rebuild drawn-down equity? Lots of farmers have seen their net worth degrade in the last couple years.
Will they make long-deferred purchases of equipment, systems and land? Those dreadful harvests kept a lot of people out of machinery dealerships.
Will they spend a bunch on something fun, or travel after the pandemic eases? Many farm families cancelled vacations and “fun” purchases when hit by long, wet and depressing harvests.
Those are all reasonable responses and good choices for what to do with this likely cash windfall.
It’s certainly an opportunity to achieve something. I suggest farmers don’t squander it.
I hope I’m wrong, but the commodity bull market occurring right now almost certainly isn’t a commodity supercycle like 2000-14, or 2006-14 in grains. This is a bear market rally in a secular commodity bear market that is likely to last until around 2030.
These rallies happen. People forget that when a long-term bull market dies. Bear market rallies can double commodity prices and stay elevated for a year or longer. On a long-term chart they don’t look that impressive, with the shadow of the last secular bull market falling over them, but when you’re living through one, they are impressive and astounding, like today’s.
The 1996 rally in corn prices was a very cool phenomenon but it was short-lived. It seeped over into other grains, but it didn’t offer farmers a lot for long.
This rally is likely to last longer, with more widespread crop problems than what provoked the 1996 corn rally and with a general commodity market rally helping it along.
But I don’t see anything to suggest a new secular bull market in commodities has begun. There’s lots of underused capacity out there in many commodities, but there will be a lag before that is brought online in industries such as oil and gas and with metals. Farmers always find ways of boosting production when prices are good. Throw some dollars up in the air and people will find a way to catch them. But it takes a while, which is why prices can soar for months.
Take this rally as an opportunity to get paid back for some of the suffering and woe you have endured for the past half-decade. Pick something you need to do.
Fix up your finances. Buy the stuff you need to take your farm to the next level.
Take the family on a holiday. Buy a really-fancy face mask.
But it’s probably not a good idea to think these kinds of prices today are here to stay. You might not have the ability to do everything you want with better prices, so make your choices carefully.
This is more like a pleasant break in winter weather than it is the arrival of spring.