I’ve been writing the Farmtario market column for some time and have enjoyed the feedback from farmers and industry representatives. Every year has a specific set of challenges. No two years are the same, although we often compare weather to a specific year in the past. This is the main factor that makes commodity analysis so interesting.
Not much has changed in the world or local markets since the last issue so I thought I would write a summary of discussions I’ve had with farmers since writing for Farmtario. I’ve tried to relate personal experiences where possible, but with my dad’s consent, because much of my commodity experience and education came from his wrong decisions over the years.
Our strategy is to make timely incremental sales throughout the crop year. This ensures that we’ll increase the overall average price.
Grain companies buy 60 to 70 per cent of their grain in the lower third of the price range. If soybeans fluctuate between $12 and $20 per bushel, companies buy the bulk of the handle in the range of $12-$14.50 per bushel.
The main point is that markets go up because there is limited selling. Markets go down because there is limited buying. There was very little farmer selling when Ontario soybean bids reached more than $19.50 per bushel in May. It was actually rather dry in late May and June in Ontario so farmers were even cautious to make new crop sales.
In my dad’s days of farming, he believed that getting 10 cents per bushel above elevator posted bid price was good marketing. He failed to look at world events.
Farmers are often specialists regarding production estimates in the 50-mile radius of their farm. This is important for your local basis level. We always start our analysis by focusing on conditions in Ontario.
Supply and demand in your area provide a good idea of the basis direction. After discussing local conditions, we focus on the macro supply and demand situation. This influences the overall direction of the futures market. Local conditions influence the basis; macro conditions influence the futures market.
Why old and new crop prices are so closely tied
The futures market has a characteristic called the “constellation of prices” when old crop stocks are historically tight and old crop prices are at historical highs. This price behavior in old crop tends to “pull up” new crop prices as the market functions to encourage acreage and production.
New crop prices will be at a discount to old crop, commonly referred to as an “inverted market.” However, the price pattern will be similar. When old crop futures are at contract highs, new crop futures are also at contract highs in many cases. This is often an opportunity to make new crop sales, especially if you need to deliver at harvest due to storage or cash flow issues.
I grew up in southern Alberta in the feedlot region. When a farmer in Saskatchewan would phone my dad and ask to sell barley, this was a bearish signal. Our feed mill on the farm had a slower leg and we used a 10-inch swing-out auger to unload. The trucker would have to weigh at local feedlot and then weigh at the same feedlot after unloading. To be specific, unloading was less efficient compared to the neighbours who had a 15,000-head feedlot.
If a farmer in Saskatchewan phoned my dad to sell barley, I knew that every feedlot in southern Alberta was full and there was no demand. This often occurred when prices were at extreme highs.
I was on the trading floor at the Winnipeg Commodity Exchange at the time. I would go over to the barley pit and sell 500 tonnes immediately upon hearing this valuable information. The barley futures would be down $20 per tonne before the farmer was even finished hauling all his barley.
Remember, this occurs at extreme highs. The market has little commercial demand at extreme highs prior to the harvest period. This is the case with soybeans this year.
My dad often made his cropping decisions based on last year’s prices. For example, when durum prices would reach historical highs, he would switch spring wheat acres to durum. We had irrigation on our farm. If my dad grew durum on irrigated acres, this meant that there was over six million acres of durum in Western Canada.
The durum market has inelastic demand so if there are over six million acres of durum in Western Canada, it means that durum trades at a discount to hard red spring wheat the following crop year. Of course, the U.S. and Europe would also have above average durum production at this time and North Africa would have excellent conditions.
In the spring, my dad would seed durum and by the fall, durum was trading at a discount to spring wheat. The following year there would be less than four million acres of durum in Western Canada so it would go back to a premium over hard red spring. All durum producers in the world would cut back on acreage.
Trading against the herd
The main point is to keep your rotations nearly the same every year unless you are going against the herd. From a larger perspective, try to trade or go against the herd mentality. The crowd is usually wrong.
During the summer of 2012, I was asked by a major business news TV network to talk about the dry conditions in the U.S. Corn futures were trading near historical highs at the time. Some of you may remember that the average U.S. corn yield during 2012 was only 123.4 bushels per acre.
This news network wanted me to say that food prices were going through the roof and that many people would starve in North America because of the drought. I basically stated the market would ration demand away from export channels to satisfy domestic requirements. I stated that if the price of corn or wheat would double, the price on the grocery store shelf would not be affected.
One learns in university that grocery stores sell packaging, not food. The cost of the actual food is so small compared to other costs like energy, wages, transportation, etc. The TV network basically cut my comments to tow the company line and try to scare the public. They only took certain comments that were in line with their views. That was the high of the corn market.
The main point is that when the story makes headline news, the highs are in. We saw this again with the canola this past year. When CBC comments on the drought in Western Canada, the highs for the canola and soybean market are in place. The rally in the market is over and prices are heading lower.
In a normal market environment when stocks are plentiful, the deferred futures trade at a premium to the nearby contract. This is called the carrying charge in the market and is basically the sum of storage costs and interest on money.
For example, if the December corn futures are trading at $5 per bushel, the March futures would likely be trading at $5.10 per bushel. This does not mean the farmer should sell in March instead of December. A carrying charge in the market tells the farmer to sell in December for March delivery to capture the storage and interest costs.
This is not the case. In many cases, if you wait until March to sell, you will receive a lower price below $5 per bushel. A carrying charge in the market is a bearish signal. If my dad saw that the deferred price was higher, then he wouldn’t sell and end up getting a lower price later in the crop year.
In conclusion, we’ve recommended to be 20 per cent sold on new crop corn, soybeans and wheat. This is a good start on sales given the current environment. Some farmers don’t forward sell before the crop is in the bin. I respect that.
In this case, just sell 20 per cent of the production off the combine or at harvest. We saw in 2012 that the corn market made seasonal highs prior to harvest.
In this issue, I’ve discussed a few “words of wisdom” for grain marketing. Hopefully, this helps readers understand the way we look at markets and how we come to our decisions.