By Steve Kell
As farmers, we tend to focus most of our attention on watching crops grow. Since our inclination is to monitor agricultural production, it tends to be that we weigh the potential crop production heavily in our decisions about where we expect prices to go, and when we will make our commodity sales decisions. Although there is certainly no shortage of weather drama in the growing season of 2015, one critical influence on the market should be monitored by everyone — and that issue is Greece’s position within the European Union.
Ontario agriculture relies heavily on the European marketplace for our grain. Nearly a third of the soybeans grown in eastern Canada (about 1 million tonnes per year), are shipped to Europe and it is growing in importance as a market for Ontario corn. Conservative estimates would put Ontario’s corn and soybean sales into European Union countries at nearly $1 billion per year.
Our market is at risk because of Greek government debt issues and whether or not Greece will be able to make appropriate payments to the International Monetary Fund and the European Central Bank. Any failure by Greece would cause the Euro to devalue relative to other world currencies and would cause imported products, like Canadian grain, to cost more. Any economic events, which cause our currency values to rise relative to the Euro, make our products more expensive for Europeans to buy.
On Sept. 15, 2014, the Euro was worth US $1.30. On June 15, 2015 the Euro had dropped 20 % in value down to US $1.05. Farmers in Ontario have been disappointed with the drop in soybean prices since last fall of about $1.50 per bushel (roughly a 12 % decline from last fall’s price). But for European soybean consumers, their costs for North American soybeans have gone up since last fall because their currency has lost value even faster. To further complicate the currency-based price spreads in the market, the Brazilian currency, the Real (pronounced ree-al), has dropped in value from about Cdn $0.60 last fall to about Cdn $0.42 this summer, which means that our competitors on the supply side of the soybean market are actually staying in step with the European cash prices.
The fortunate thing about being in the food industry is that prices have less of an impact on demand than they do in more discretionary purchases. As prices rise, a consumer’s paycheque won’t go as far as it used to. There are a lot of products they’ll stop buying before they stop buying food. Purchases slow down for electronics and vacations a long time before people stop eating. But spending gets curbed at every level.
However, even though European grain demand might not shrink substantially in times of inflation, it does change purchasing behaviour.
Suppose you are driving down a highway and see a gas station with a sign out front announcing $1.75 per litre for regular gasoline. If your fuel gauge shows any amount left in the tank, human nature would not suggest you pull in and fuel up at a price that far above your normal expectation. But when you need gas you’re going to have to stop even if the price is $1.75. There is a school of thought that says the core demand for grain products might not change very much if prices rise in Europe but the consumer’s buying behaviour is certain to adjust.
I would not speculate on how the current issues with the Greek government’s debt are going to be resolved, any more than I would care to speculate on what the weather will be like during mid-August. The reality is that both of those variables have the capacity to significantly impact the way in which grain prices unfold heading into harvest.
One of the most important skills to develop in making good selling decisions is to see the transaction through the buyer’s eyes, and in our grain market, understanding the European currency market is important.