These are not your father’s markets. Your father likely looked at production, export demand, basis levels and flat pricing opportunities when he looked at marketing his crops. Cash flow requirements and delivery opportunities were liable to win out over a disciplined market approach and perceived commodity appreciation. That has all changed in the current marketplace today’s farmers find themselves in.
Exchange rates, credit swaps, credit insurance, credit liquidity, the Baltic Dry Index and LIBOR rates (the interest rates banks charge each other) are just as common on a farm weekly marketing page today as bushels per acre was 25 years ago. In this column, we will focus on shipping and currency exchanges and how they are affecting pulse and special crops pricing.
The Baltic Dry Index (BDI) measures the cost of chartering large bulk ships and is regarded as a leading indicator of global economic activity. The index, managed by the Baltic Exchange in London, covers dry bulk shipping rates that takes in 26 shipping routes measured on a time-charter and crossing basis. The index covers Supramax (25,000 to 60,000 metric tonnes (MT), Panamax (60,000 to 75,000 MT) and Capesize (65,000 to 140,000 MT) dry bulk carriers carrying a range of commodities, including coal, iron ore and grain.
The BDI has fallen 90 per cent since May 2008 and in the third week of October has fallen for 14 straight days. A factor into the demise of the BDI has been banks reluctance to issue Letters of Credit (LC) to facilitate trade in key bulk commodities. Falling scrap iron prices have seen some Indian banks refuse to honour LCs, in the fear that ships are no longer worth enough to cover the sum guaranteed. When this information was first relayed to me via an Indian pulse trader, it brought back memories of a senior statesman in the grain industry outlining to me how he determined the fair market value for a fleet of ships that he was bidding on. It was easy, he said, “We determined the scrap value of the ships and bid accordingly.”
Trade credit used to be one of the safest — if not the safest — form of lending. That all changed when the sub-prime mortgage crisis hit the United States and then spilled out all over the globe. Trade credit insurance rates have risen to between five and six per cent from one per cent, and commodity trade finance has become harder to source as interbank lending essentially has dried up. For pulse and special crops and all other Canadian grains, the availability of trade credit is an essential requirement for exporting. Without it, demand dries up and prices fall as stocks build in exporting countries.
Farmers across Canada have been lectured for the past half-century on the benefits of globalization. If there is one lesson to be learned over the past 60 days, it would be that the world economy is very integrated and you can bet your last bushel of lentils that when the recovery is near complete, there will be much more rigid criteria for trade credit, lending and the utilization of financial instruments to mitigate risk.
The bright spot on the short horizon is that the Canadian dollar fell to its lowest level in more than four years versus the U. S. dollar towards the end of October as investors moved from commodities into more secure government debt. The dollar is headed for its worst monthly fall since at least 1950, depreciating 17 per cent since September 30. While some of the Canadian dollar’s demise can be attributed to the slide in commodity prices, margin calls continue to put undue upside pressure on the U. S. dollar, as non-U. S. banks scramble to cover large U. S.-dollar short positions on their balance sheets creating a rush to U. S. dollars and a weakening of domestic currencies, primarily European.
The fall in Canada’s currency has sheltered some of the grain losses witnessed in the export markets, but consumer confidence must be regained worldwide to have a lasting effect on prices and return “demand” to the marketing vocabulary. Production and demand are much easier to dissect than credit swaps and the BDI Index. These are not your father’s markets and the probability that they will return to what once was is remote. Stay on top of your marketing plan and if you don’t have one, it is not too late to devise one. The credit crisis is likely to stay with us for sometime, but everyone must eat and that, in the end, could be the wakeup call the grain markets need to break out of this slump.
Larry Weber is president of Weber Commodities in Saskatoon. Email him at [email protected]