But things have been slowed by some sporadic, cooler, wetter weather (a mini-blizzard in southern Manitoba!). The U.S.D.A.’s progress report is showing us that corn sowing is slightly behind schedule with the southeast and eastern regions way behind. As a result, even the seed companies are admitting that prospective corn acres there could be switched over to soybeans or sorghum as the optimal yields window passes. Conversely, U.S. spring cereal seeding remains ahead of schedule and the U.S. winter wheat crop did enjoy the rain it got in mid-April but the portion of the crop rated good-to-excellent continue to fall in major growing states in the southern plains. Overall, some of the noise currently playing with traders’ and farmers’ emotions includes updated weather reports, rumours of more labour strikes in South America, lower feed demand in the U.S. because of a bird flu making the rounds, and crop-killing rain in parts of India.
As we’re heading into a year where growing conditions remain relatively alright, the supply-side argument looks to be well-backed in the form of more big numbers. Some people are starting to compare the phase of the commodity cycle to that of the 1980s where margins were similarly tight (albeit interest rates are significantly different than back then). On that note, we are also using more technology on the farms these days, which is relatively increasing production come harvest time. So while there’s argument that this a good thing for the rest of the world as more and more farmers employ new, but expensive technologies that produce more and more food, it also means that food prices will fall, leaving the aforementioned margin smaller and smaller. Alas, this can push more people out of farming (a la the 1980s) but I’m confident that we run our operations more proactively these days between penciling out our costs of production and locking in profit as it becomes available (“make sales when you can, not when you have to!). The good news is that countries like Saudi Arabia and China are abandoning their self-sufficient agricultural policies, relying on those who are the best in the world as providing them food security.
Let’s keep things relative though – the market will continue to move regardless of your margin. Some of these moves are legitimate fundamental factors. For example, the most recent StatsCan report shows that 19.4 million acres of canola will get planted this spring, versus expectations of around 20.3 million. Other acreage differences were more pulses (no surprise there), more flax and way more oats and barley year-over-year. Comparably, when little things like the aforementioned “noise” happens, the market gives a knee-jerk reaction to the aforementioned noise. This in mind, managed money is sitting at or near record short positions on the futures board, and some would consider that to be a contrarian indicator that we have bottomed out and there’s only upside here. It also brings back the argument that if there is any significant weather risk (i.e. continuous rains slowing down Plant 2015) or increasing geopolitical risk (i.e. another Arab Spring in Egypt), the market will rise and managed money closing out of short positions could accelerate a rally. That being said, these sort of rallies should be identified as opportunities – traders look at it as “buy the rumour, sell the fact” where a farmer should think of it as “sell the rumour, profit on the fact”.
To growth,
Brennan Turner
President, FarmLead.com
Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, Mr. Turner spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and now mobile grain marketplace (app available for iOS & Android). His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email (b.turner@farmlead.com) or phone (1-855-332-7653).