Rising grain prices make this drought different

History may not repeat itself, but it rhymes.

That piece of wisdom, often attributed to Mark Twain, seems appropriate for the devastating drought that has hit most of Western Canada. Some aspects are the same as previous droughts and some have a different twist.

One unique feature is the rapid rise in grain prices occurring before the drought and the continued price escalation fueled by the drought. This has created a large disparity between crop insurance prices and market prices.

Crop insurance sets its prices early in the calendar year based on the best guess of where prices are going to be at harvest. In Saskatchewan, the prices per bushel were pegged as follows: HRS wheat – $6.12; durum – $6.93; barley – $4.90; canola – $12.02; peas – $7.51.

Market prices are now 40 to 90 percent higher than crop insurance prices and the gap could widen further. It’s an incentive to scrape up every possible bushel. On the other hand, it makes it more difficult for cattle producers trying to reach a deal with grain farmers to buy standing crop for green feed.

At the risk of sounding like an old fogey, I can remember years in the 1980s where the situation was reversed and crop insurance prices ended up higher than market prices by the time combines were rolling. Every additional bushel you harvested cut your crop insurance payment by a more valuable bushel. Talk about a disincentive.

This year’s massive price increase has also created a huge issue with deferred delivery contracts. Statistics are not available, but forward contracting was probably more popular this year than ever before. Crops such as feed barley had never seen such attractive new crop prices and canola was also riding high.

It’s considered good management to lock in profitable prices on part of your expected production, but it’s also important to be cautious in case you have a production shortfall. Many were not cautious enough.

Take for example a producer who expects to produce an 80 bu. barley crop and hasn’t had a crop below 60 bu. in his farming career. This year, he may have locked in a price for 60 bu. an acre, but he’s only going to produce 40. Buying himself out of the contract shortfall is going to be frustrating and expensive.

It’s unprecedented for market prices to exceed contract prices by such a wide margin and it’s rare to have so many producers offside on contracts. The magnitude of the problem decreases the wiggle room as farmers and grain buyers come to terms.

Expect producers to be far more cautious about deferred delivery contracts for years to come. Big contract buy-outs could become part of agriculture folklore.

“Grandpa tells of a time back in 2021 when he had to buy out a canola contract for $100,000 and that was a lot of money back then. He says we should never sell anything that isn’t already in the bin.”

Unlike droughts of the 1980s, this one won’t lead to widespread dustbowl conditions. Crop residue will be minimal in many areas, but direct seeding should prevent extensive wind erosion.

On the other hand, grasshoppers are back with a vengeance. With the hot, dry summer they’ve reached the adult egg-laying stage early. Conditions are ripe for serious grasshopper problems in next year’s crop.

Also like previous droughts, rain and lots of it is needed to brighten prospects for the next growing season.


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