So you’re a market-savvy prairie farmer. That means you understand that farmers yearly face a giant market risk when they have to choose what to seed for the growing season.
Farmers have a host of factors to consider in choosing what to seed, and many are not market-related. Rotations are the obviously dominating factor for most decisions. But forward price expectations certainly play a role not just in what you do with your flex acres in any one spring, but also for what crops you decide to try to develop an expertise in.
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The problem is that once the seed is in the ground, there’s not much you can do to react to market developments. Right now canola looks like the obvious crop to plant this spring, but what happens if the outlook suddenly gets worse in July? What can you do about it? You can’t pull the seeds out of the ground and substitute a better looking crop. You’re stuck for a year.
That’s a bit of market disjunction that creates lots of problems for farmers. The market changes every day. Farmers make their seeding decisions one a year.
But it might surprise you to know that annual prairie crops are actually fleet-footed ballerinas of supply and demand, able to flit back and forth lightly and instantly, compared to the big bully of oilseeds. If the oilseeds outlook goes into the toilet, next year farmers will adjust acreage. It doesn’t seem fast when you’re living it, but it is compared to the decision cycle that palm oil producers live with.
When a palm oil producer decides to plant acres to palm trees, he’s not looking at next year’s market. Those trees won’t be producing harvestable crops for five years and won’t mature for eight years. And when those trees come to market they will produce for up to 25 years with minimal inputs. Once they start producing, there’s no reason to stop harvesting their crop. The expense has been expended.
Oddly enough, as I found out from a presentation by David Jackson of LMC International at the Canola Council of Canada convention last week, palm oil producers aren’t looking at next year’s prices when they choose to plant. They’re looking at this year’s prices, and last year’s. They are making quarter century long decisions based on short-term backwards looking prices.
That’s a pretty broken S and D situation, it seems to me.
What it means, Jackson noted, was that the super-high prices of 2007-08 caused Indonesian farmers to plant millions of extra hectares of palm trees, and high oil prices – and palm works into the energy equation – since have not stopped the planting of new palm plantations. That means that about three or four years away a huge amount of palm oil is coming to market, and that is going to be bad for prices.
You’d think Indonesian palm planters would call up a fellow like David and ask him about the longer term outlook, but apparently palmies are a lot like many farmers: they plant looking at last year’s prices. So there’s a certain doomful inevitability to more palm coming to market.
Prices for veg oils should get weaker, and there will be a supply adjustment to that weakening. Unfortunately, it won’t be from the palm oil producers who are causing the weakness: it will come from canola and rapeseed producers around the world. They might miss the start of a bad year if prices haven’t started falling, but once the downtrend is in farmers with annual crops will be able to adjust-down their acreage and lower future supplies a bit.
What about soybeans? Those acres aren’t likely to decline, Jackson said, because that crop is grown for its meal, and with booming meat demand, a slight drop in oil values won’t mean too much to the long term price trend. For canola, with the vast majority of its price set by the oil value, that isn’t true. Canola now yields about 45 percent of its weight in oil, and much more in value.
So these Indonesians and Malaysians have done the equivalent of ordering a fleet of battleships to be built, a fleet that’ll take a few years to get built. Will we be ready to face it? Should we build our own fleet, as our mother country Britain did when facing the pre-1914 German battleship menace?
It takes a massive investment to ward off a major threat, but massive investments have already been made in canola by industry, governments, universities and farmers, and many more are planned. The past few months have been filled with announcements about new canola research funding and centres, so with luck we’re well ahead of the Palm  Menace. Perhaps, like the German fleet in Scapa Flow, palm will end up on the bottom of the ocean, and we floating serenely above. Maybe they’ll lose the money, stop planting, and leave us eventually victorious.
In many sense we already are. But it won’t be more acres. Hopefully, it won’t be less acres. The way out of this coming hole, canola developers say, is to boost per acre bushels enough so that the downtrend in prices can be more than matched by an uptrend in yield.
So, if we’re lucky, the long term price charts for canola may get ugly-looking, but the per acre yields for producers can remain profitable. And that’s the only chart that counts.
