We’ve underestimated the impact of energy on grain and oilseed prices. With oil prices down, demand from the biofuels sector has slumped. And it shows

A weak energy market and worldwide drop-off in demand are making it tough to arrive at fair value for a bushel of grain. Crude, floundering around $40 a barrel, is a clear sign of a staggering economy. Biofuel markets have taken a nose dive. Just last summer and fall, the biofuel industry anticipated that over four billion bushels of grain would be gobbled up for ethanol, but no dice.

PMG Marketing Adviser Ron Frost sees it this way. “If the overall economy and energy prices were stronger, the grain outtake into energy would have provided a much stronger floor price for our grain and oilseed markets. We’ve just come down again to $3.75 corn on the front end, and that simply doesn’t make profitable ethanol. Ditto for canola. When you’re trying to make diesel fuel, canola doesn’t work at $430 a tonne, or about $9.50 a bushel. Neither corn nor canola can compete against a gas or diesel price at the levels we’re seeing today.”

Biofuels have crashed big time. VeraSun Energy based in Sioux Falls, South Dakota operates 16 ethanol production facilities in eight states. Currently two-thirds to three-quarters of their production facilities are reported to be up for sale after Chapter 11 bankruptcy proceedings this fall.

Says Frost: “In the last few years, we’ve tended to underestimate the impact of the energy on the grain economy. It is a linkable connection, and we’re experiencing the reverse effect right now.”

CREDIT STILL A FACTOR

“Collapsing credit markets are also contributing to lower grain prices,” Frost says. “Pulse markets are heavily impacted. End buyers and brokers in the Middle East and Asia are having a hard time getting credit.”

We’re feeling the effect of tight credit at every level of the Canadian export market. Pulses are a prime example of how closely our export markets are connected to wider economies, but wheat and barley export numbers, as reported by StatsCan, are also down between 20 and 30 per cent.

“On the positive side, the contraction of demand has brought down fertilizer prices by about 50 per cent,” says Frost. “So profitability can still hold its own at the farm level. Canola prices, in particular, are still making farmers money.”

A 10-year history of canola prices shows us we’re still in pretty good shape. We’re trading somewhere around $430 a tonne. Frost says this is still exceptionally high relative to other years in the past decade when we had comparable ending stocks.

Analysts forecast a canola carryover of between two and three million tonnes at the end of the ’08-09 crop year (July 31st), based on a crop of 12.6 million tonnes. In Canada, the last two times we had a carryover greater than two million tonnes were in 2005-06 and 1999-2000. During both of those periods, canola prices spent 24 months at or below $325 a tonne.

“I maintain we’re still at a new plateau for grain prices,” says Frost. “Demand issues have dragged on our grain prices, but we’re still trading at an elevated range compared to the average over the last 10 or 15 years. Canola has come up about $70 to $80 a tonne from the lows that we hit in December ’08.”

Currently, the price of canola is strong relative to wheat and barley. “Prices may even inch a bit higher,” says Frost. “When producers sit down to do their plans for profitability, canola will no doubt stack up quite favourably.”

WEATHER IN ARGENTINA

Argentina is one reason we’re strong in canola. The Argentine crop experienced the worst drought in 50 years. Winter wheat crops in the southern U. S. Great Plains and China are also recording one of their worst droughts in 50 years, although the critical yield determining growing season is still ahead. This contraction in supply is assisting to offset some of the demand contraction we’re seeing in global markets.

During a time of excess supply and contraction in demand, it’s interesting that we’ve wound up holding canola prices in a profitable range. However, the exact level of that equilibrium will continue to be a moving target and continue to challenge producers looking for fair market value for their grain.

Frost simplifies the challenge: “I think market value is never anything more complicated than a price buyers and sellers come to terms on in a transaction. Fair market value will continue to be impacted by weather issues, crop failures, credit shortages, energy demand and the biofuel industry.”

To figure out fair market value this year, tune in the global energy picture and the outlook for international supply and demand. In a matter of months, we could see significant shortages with accelerating grain prices. And do your numbers. Now that fertilizer and fuel costs have come down, you may be able to say to yourself, “Hey, I can make some money this season. Prices may not be where I want them, but there are some prices, especially in canola, that I can live with.”

Gary Pike is president of PMG. PMG provides management, marketing, business planning advice and coaching to members who represent 2.5 million acres in Western Canada. To find out more about PMG and how to become a member, visit www.agcoach.caor call us toll free at 1-877-410-7595.

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