Giving an outlook on the grain markets in this environment is like giving a weather forecast. We can get fairly close a week out but long range it seems like we have about a 10 per cent chance of being right. Of course, that doesn’t stop us from being able to look at the situation, weigh the risks and rewards and make some decisions based on what we know today.
See Figure 1 for a rundown of the 2010 growing season.
Meanwhile, back home in North America, we are focusing on the production here at home. It is clear that production is going to be down on most commodities. Corn being king, it is receiving the majority of attention and production estimates seem to be dropping from every report that comes out. It becomes clear that corn will need to be in a demand rationing situation as demand is poised to draw stocks down to a very low level. This will set the stage for a looming acreage battle come spring largely between soybeans and corn — but other crops are assured to be in the fray as well including wheat and barley.
On top of all this fundamental garble, we have a world economy that teetering on the economic Armageddon of our time, as some would describe it:
Countries, such as Greece and Ireland, on the verge of bankruptcy
A faltering U.S. economy that keeps printing money to try and get themselves out of trouble
The Asian powerhouse, China is gobbling up commodities in an unprecedented way
As I write this, we are going through a turbulent downturn in prices that few saw coming largely driven by outside forces. China is working hard to curb inflation by raising interest to help slow down the economy in combination with using reserves to settle down the market. This will inevitably slow down demand for North American commodities. The EU is also looking at slowing down inflation by releasing reserves of barley. It has been rumoured that they could release as much as 1.4 million tonnes into the market.
I’ve covered some of the events that have led us to this significant price increase from spring expectations to a bit of a setback in the highs. The question now is where do we go from here?
Looking at wheat, we know that the world wheat stocks remain fairly high but some are suggesting that there will be a Supply Demand Deficit of up to 20 MMT or three per cent. Recent price drops only encourage more demand. This is evident from talk that Egypt and Iraq just recently purchased more wheat from the U.S. since it has come off recent highs.
As a grower, I will be going into the spring cautiously optimistic about wheat and I am likely to do some forward pricing. Currently, old-crop basis levels are historically high compared to recent history, which I think is reflective of the demand. See Figure 2.
I would encourage farmers to watch for new crop opportunities in the mid-$7 range or at least keep that number in mind when budgeting next year’s crop. I think for ethanol wheat, which is gaining popularity, my initial target has to be in close to $5 per bushel at the very least. This will largely depend on the U.S. ethanol mandate and on whether or not subsidies are renewed. This is something that is in question right now since the Republicans took over the house. Some thoughts are they may cut these subsidies as a budget-cutting measure. Today, the economics for Canadian plants favour high starch wheat versus expensive corn.
Durum, out of all types of wheat, still seems to have some issues that need to be resolved. While the North American market has strengthened, Algeria has recently implemented an import tax on durum. North Africa is typically where we focus on in the durum market going into spring. Indications are that conditions in North Africa durum areas are experiencing good growing conditions. We will need some further acreage slip to see durum gain traction, in my opinion.
As for barley, we have seen the corn and feed market as big drivers behind barley. Good demand, along with hampered North American production and curbed exports from Ukraine cause me to remain optimistic on barley. Unless corn drastically unravels, barley remains a relatively cheap option. Again, linking the economy and the U.S. ethanol mandate, barley remains positive as long as something significant doesn’t happen to corn. It is widely expected that malt supplies could be tight going into next year, which is currently not the situation largely due to a large carry-out. It is widely viewed that barley production next year would not need to see much of a hiccup to gain traction. For price targets for your crop-planning purposes, I would suggest feed barley in the low $3 range and malt in the mid-$4 to $5 range.
High commodity prices are great but when they come in a time of economic uncertainty many parts of the world have increased price sensitivity resulting in demand rationing occurring much faster than we can imagine. Although I am generally bullish on most types of wheat and barley, and am generally excited about the prospects of a looming acreage battle between corn and soybeans, there is that knot in my stomach that says proceed with caution. There are too many outside influences that can undermine my fundamental way of thinking. Be greedy, but don’t be stupid.
MarkBratrudfarmswithhiswifeBobbie nearWeyburn,Sask.TheyalsorunBratrud AgAdvisoryServices( www.bratrudag.ca)
Figure 1HERE’S A LOOK AT THE 2010 GROWING SEASON:
SPRING 2010 JULY 2010 MID-AUGUST 2010 AUGUST 17, 2010 MID-SEPTEMBER 2010
Wheat looked like a dog, all be it the stronger dog, in terms of cereal cropping options for us. We faced burdensome stocks and most of the decisions were made based on rotation rather than profitability. An average crop was looking like a break-even scenario.
The market was beginning to show some life, and we had just come through a challenging planting season in the north. Talk was starting to focus on dryness in the FSU (particularly the Black Sea region) and how Russia may approach their policy on exports.
Discussion began to swirl around Russia banning exports for a period and what that would do to stocks in Ukraine. Uncertainty existed in how they would be affected by excess low-cost shipping capacity in the Black Sea region with strong demand. If Ukraine didn’t respond by curbing exports of wheat and barley their stocks would have been sucked dry in no time at all. This was significance in the wheat market but more so in barley as Ukraine is the world’s largest barley exporter.
Bloomberg reports that Ukraine will limit exports of wheat and barley until at least Dec. 31, 2010. This impacted the barley market, as it became evident that with lower world stocks barley would have to become the highest-priced feed grain.
It became very evident that the FSU would remain absent from the export market for an extended period of time.