First, let’s review what was happening six months ago.
Cold snowy weather backlogged logistics, but problems started months before that, in late summer and early fall. World buyers were buying little grain from Canada. They saw the big crop coming and waited for prices to fall. We lost two to three months of potential shipping opportunities that would have helped move our bumper crop. When cold and snow arrived to slow down railway services, things went from bad to worse.
The grain industry’s response was, from a business perspective, the appropriate reaction to stop the flow of grain into a blocked handling system. Widening basis levels told farmers it was not a good time to try to move grain.
Now let’s look at last fall from the farmers’ perspective. Prices from the previous crop year were very good and the current crop looked as if it would be above average, so farmers were not worried about pricing grain for fall delivery. World buyers were stepping to the sidelines, not buying, as they assumed the big crop would cause prices would fall. This made it difficult for grain companies to make significant sales early in the crop year. We lost two to three months of opportunities to export grain from Canada. That would have been critical in alleviating logistical problems that arose later in the winter.
To make sales, the prices of our grains had to fall, and so they did so rather quickly. As prices fell many farmers became reluctant to sell, hoping for prices to rebound.
As harvest concluded it was evident that yields were above average. Buyers held off, looking for cheaper prices. Grain companies widened their basis levels as facilities become congested.
Then winter hit with a vengeance and the logistical nightmare began. Our inability to get grain to port impacted our reputation as a reliable grain supplier. Buyers went elsewhere because they could not be sure they could get the grain from Canada.
This caused a back up of vessels at port. Demurrage costs would have to be paid. This forced the grain companies to widen their basis levels even more. Some even stopped buying specific grains for a while.
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Now, not only had the futures prices been falling, but basis levels doubled or quadrupled leaving farmers facing the lowest prices they had seen in years.
With buyers backing away, grain companies who were buying weren’t buying for nearby delivery but instead three to five months forward. They didn’t know how long it may take to resolve logistics issues. Farmers selling grain would sell at low prices and wouldn’t move it until spring.
Many farmers started looking to other options. Cash advances were taken out in record numbers. Some farmers reworked their operating lines of credit with their bankers to get them through spring seeding. Others sold cattle. Farmers with no other options sold grain bring in cash to keep operating.
You do what you have to and make the best decisions you can.
Changes in the market
Tight supplies of old crop U.S. soybeans, aggressive Chinese buying and disruptions in the South American harvest have pushed beans to new highs.
A hard winter damaging the U.S. winter wheat crop, calls for hot dry weather across the southern U.S this summer and unrest in the Ukraine have helped push wheat to new 12-month highs.
The PED-V virus and low cattle numbers have pushed livestock prices to new highs, pushing corn and feed grains higher.
The federal government has proposed rail legislation with performance targets and penalties to try to alleviate the grain backlog.
These and other factors have pushed futures values higher the past three months. Sales and logistics are improving and basis levels have narrowed; farm prices are substantially higher than they were five months ago.
But where would prices be if these market-changing events hadn’t happened? We can count ourselves fortunate that we had such a good crop and that the markets have rebounded.
I hope we all take the events of the last year as a sign and realize that we are at the genesis of a new marketing era in Western Canada. Markets will respond swiftly and aggressively to change. When they react they will most often overreact because of the players involved, the money they have and the technology they use to play in the markets.
As a primary producer you are fully exposed to these market swings and fluctuations. You need to be prepared to react quickly to protect your bottom line. It is critical to have a marketing and pricing plan in place to protect yourself when futures or basis shift dramatically. Know your numbers and when profits are available, secure them. †