Russia’s war on Ukraine and its impact on crop production and global agricultural trade might rule the headlines, but when it comes to North American seeding plans the cold logic of crop budgets determine what gets seeded.
Black Sea wheat and corn supplies are in doubt, but the world is also short on oilseeds, driving their price to multi-year highs and because they are cheaper to grow than corn or wheat, American farmers are leaning toward the oilseed.
Financial realities also dominate when it comes to where grain will come from to backfill the supplies missing from the Black Sea. If India has some relatively cheap wheat surplus, bargain-conscious buyers will turn to it before more expensive crops from North America or Europe.
Read Also
USDA’s August corn yield estimates are bearish
The yield estimates for wheat and soybeans were neutral to bullish, but these were largely a sideshow when compared with corn.
The suffering in Ukraine because of Vladimir Putin’s invasion has generated a huge outpouring of sympathy and support.
People also see how the war is creating energy and grain shortages worldwide and search for ways they can be addressed.
They ask, “what can we do to help?”
This is an agricultural newspaper so I’ll focus on the food side of this issue.
Canadian farmers, like their counterparts around the world, work to put food on the table all the time. Most of what they grow they sell annually. They don’t have a long-term store pile to dip into to help in an emergency. Only two countries, China and India, have huge government-owned stocks, and I’ll talk about that later.
Farmers in the developed world run their operations to achieve the greatest efficiency, output and profit.
Planting decisions are based on budgets that include forecasted yields, crop prices and input costs as well as the long-term sustainability of the operation.
We have an example of what that means, scaled up to the country level, with the March 31 U.S. Department of Agriculture’s planting report, which was based on farmer interviews in the first two weeks of the month.
The conflict in Ukraine may have put the spotlight on corn and wheat, but farmers told the USDA they planned to increase soybean area by four percent and reduce corn by four percent and cut spring wheat by two percent.
The report surprised many, but it showed farmers were clear-headed about their economic interests.
The rule of thumb is that growing soybeans is more profitable than corn when the new crop price of the oilseed is 2.5 times the price of corn. It is often called the soybean-corn ratio. The profitability of growing corn becomes clear when that ratio falls to 2.4 percent or less.
All through February the ratio was about 2.45, so neither crop had a clear edge except when you also looked at the soaring price of fertilizer. The cost of fertilizing corn is likely twice as much as for soybeans and that factor clearly swung the budget in favour of the oilseed.
Since the release of the planting report, the larger than expected soybean area caused new crop futures for the oilseed to fall and corn has risen. That means the soybean-corn price ratio now favours corn.
Will farmers adjust plans at the last minute given that they have already secured their seed and inputs? There is always some shifting between the March report and the June acreage report, with the degree of change linked to prices and especially weather.
Also, farmers might be thinking that part of the reason corn and wheat prices are so strong is because of the war. We are all hoping for a peace settlement and if one is reached, then Black Sea grain will be more available and the price will come off the peaks.
But the war has had little impact on oilseed prices. They are based on global tight supply and there is less likelihood of them falling until farmers can grow enough to end the shortages.
So American farmers are growing what the market and their crop budgets are telling them. I expect when Statistics Canada issues its planting report we will see a similar story.
Turning to the question of where will wheat supplies come from to meet the immediate shortfall caused by Russia’s war on Ukraine, once again it will be answered by cold hard economics.
The United Nations World Food Program and poor countries such as Egypt bought Black Sea wheat based on price and proximity to need.
Into this gap steps India, which is expecting a record wheat crop for the fifth year in a row. Also, India is one of the few countries with huge government-owned wheat stocks that could be sold and exported quickly.
Indian wheat is also at a $50-$100 discount to European and North American wheat.
India’s government forecasts wheat exports of 12-15 million tonnes in the coming crop year, up from about seven million in the current year.
