Market forecasters work with imperfect information

What will be the important but unknown thing this year that upends market forecasts?

This is the time of year when governments and private analysts make preliminary forecasts of spring crop seeding.

Prices are the highest in years. Futures markets and pre-seeding contract prices for 2021-22 production are attractive.

Most people, including me, think crop revenue in 2020-21 will be good. Global supplies of corn and oilseeds are not comfortable and prices must be at a point that will limit demand and encourage increased production.

But that assessment is based on what we know now.

In the past year we were shown how forecasts can be proven wrong. Indeed, some believe that there was a repeat of the Great Grain Robbery, with China taking the place of the Soviet Union.

In 1971-72 Russia suffered a drought and severe grain shortage. The Soviets negotiated a package with the United States to buy more than 10 million tonnes of wheat and corn with subsidized loans. At the same time the Soviets also bought up huge quantities of grain from Canada and other exporters.

The unprecedented buying helped end a period of massive oversupply and grain prices surged higher.

Some argue that if sellers had known how desperate the Soviets were, the extent of their buying and how much global production had fallen that year, they would have held out for higher prices.

However, that is with 20/20 hindsight. The sellers acted with the information they had.

Coincidentally, in July 1972 the U.S. launched the first Landsat satellite, providing the first technology to monitor crop conditions around the world.

Today we have an array of Earth monitoring satellite technology and our ability to track global trade is much better. However, information remains incomplete.

The situation last summer is an example.

Even into the growing season we did not know how much the pandemic would affect global grain demand. The U.S and China had called a truce in their trade war and the latter had committed to buying more American farm goods but its early buying was far short of the agreement’s terms.

In July the outlook for crops in Canada and the U.S. was favourable. Satellite images looked great.

One Canadian private analyst toured the Prairies and was so impressed with prospects in the second half of July that he predicted a bumper crop.

But just then temperatures soared and the rain stopped in large parts of the Prairies. Yield prospects fell.

It was a similar story in the U.S.

As production estimates declined it also started to become clear that the pandemic wasn’t hurting grain demand.

Exports from Canada and the U.S. began to soar, with movement to China at record or near record levels.

Then news broke in late August that a couple of typhoons that hit China’s corn belt might have caused significant damage. The price of corn in China jumped higher, even while Chinese government officials said the crop was fine. Speculation mounted that China would have to add corn to its buying spree.

In early September weather agencies announced that a La Nina had developed and would carry on into winter. That caused dry weather in South America, delaying seeding and stressing young plants.

These unexpected developments caused grain prices to steadily rise.

Does that mean those who priced crops in the spring and summer were robbed?

I’d argue they weren’t. The price at that time was based on what was known at that time. The situation changed.

So, here we are today and the information we have now is that crop supply is tight.

COVID-19 vaccines are rolling out and by summer a good portion of the world should be protected, allowing governments to start lifting restrictions. That should trigger increasing economic activity, which will be further stimulated by government spending.

Some analysts expect this stimulus, coupled with previous years of under investment in commodity production capacity, will lead to a multi-year commodity boom.

But what don’t we know?

Could new more dangerous variants of the virus pop up that are not controlled by the vaccines? I hope not but it is not out of the realm of possibility.

Could African swine fever make a comeback in China’s hog herd or could it break out in Europe or here in North America? Again, I hope not.

What will the weather be like this summer? La Nina should be gone by then, but will its effects linger?

I watched a disaster movie the other day and plot was that parts of a comet hit the Earth and the only place to survive the devastation was Greenland of all places. Gee, I hope that doesn’t happen for real.

I think I’ll hope for an uneventful year, full of data points that are just average.

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