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World events impact the farm

When you’re a farmer, world economics have a direct impact on your bottom line. Here’s a review of some of the hotspots to watch for the rest of the winter

Published: February 11, 2015

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oil derrick pumping in a wheat field

Let’s review world events that could impact grain markets.

Recent U.S. economic reports show the economy growing at a better-than-expected pace over the last few months. This is starting to push the U.S. dollar higher as investors look to the dollar as a safe investment haven. This is driving the Canadian dollar lower, back down to six-year lows in the $0.85 range. This is helpful from a competitive perspective in global grain markets when selling against other countries (the U.S. included), but the higher U.S. dollar is pressuring U.S. grain futures lower, helping them remain competitive. The net result is that you end up getting paid less for your grain because we are so closely tied to U.S. grain futures for our pricing.

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The higher U.S. dollar helps decrease the cost of imported goods such as fertilizers and machinery for U.S. farmers. Conversely, the lower Canadian dollar isn’t helping Canadian farmers as it makes the price of these products higher here. So, we’re experiencing a double whammy effect with grain prices falling and the cost of machinery and inputs going up. There go the profit margins.

China’s level of economic growth has been decreasing for the last three years which does not bode well for world grain prices. World stocks are at record levels. Now demand from the major world economic power is slowing down, which means in order to sell the excess stocks prices are going to have to fall to incent buyers to buy more. Thus the fall in grain prices to five-year lows over the past six months.

Oil prices

Oil prices continue to fall to levels below $50 a barrel. From a world economic perspective it depends on whether a country is a net producer of oil or a net consumer of oil as to whether will see an economic benefit or economic downturn. Producing countries will no doubt experience a slowdown in oil related activity. If these low values persist, no doubt drilling activities and building new refining facilities will be put on hold which means lost jobs and an economic slowdown.

From a farmer’s inputs perspective, lower oil prices should be a good thing, but until now we have not seen an equally corresponding drop in the price of diesel, which would be the most beneficial for farmers. Analysts say that further drops in the price of diesel should be coming later in January and early February. Let’s hope so.

Oil-consuming countries will be able to stretch their buying dollar further if they are paying less for fuel so hopefully that translates into increased spending for other consumable goods (like grains) and helps to create economic growth in those countries.

Rail transportation issues seem to have worked themselves out over the past few months. Warmer (than last year) winter weather across the Prairies and the drop in oil prices (due to reduced export demand) have helped the railways to maintain and increase the levels of grain shipments to port the past few months.

In fact it is very interesting that in just 12 months we are seeing a complete reversal from last year to this year with U.S. rail logistical issues. Last year U.S. grain shippers were paying extreme premiums to get railcar shipping; now they are releasing railcar allocations back to the railways at no cost. Why? It appears export demand is starting to soften due, no doubt, to a higher U.S. dollar, which means previous sales are likely being cancelled or delayed, forcing grain companies to readjust their sales and freight plans. If this persists, more wheat will be left sitting on farms. Futures values are going to have to adjust accordingly to get buyers back in the market for U.S. wheat.

The months to come

If there is not continued economic growth in the major importing countries of the world like China to help purchase and or consume the excess volume of grains the world has produced the past two years, then the only thing that will fix this issue quickly will be a severe reduction in world grain production this coming year.

If that doesn’t happen, then it is going to take some time for the world to chew through all of this grain, likely two or three years, which means prices are destined to stay at these current levels and or lower until such time as the grain glut is resolved one way or the other.

We know the size of the North American crop and there are predictions of up and coming bumper crops in South America, which doesn’t bode well for helping to reduce overall world grain inventories going forward. So it looks like we best prepare for another stint of lower prices for a couple of years as we try to work through the more than adequate world grain stocks that are available.

Sharpen your pencils and work your cost of production numbers, set some marketing price targets and look for pricing opportunities to lock your target values in. In years of tight margins you want to ensure your costs are covered and then build in profitability from there.

About the author

Brian Wittal

Brian Wittal

Columnist

Brian Wittal has 30 years of grain industry experience and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd.

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