Steve Kell’s
Market Minute
The purpose of price is to ration demand. It’s a simple concept, but when we allow ourselves to star-gaze at these record high prices, we forget this simple truth. 2022 has seen both substantial reductions in the global supply of grains and oil seeds in conjunction with record high increases in price. The question which Ontario grain producers need to wrestle with as they contemplate making more sales is: Have prices risen enough now to limit demand? Or is there still room for values to push higher?
The 2021 crop marketing year has been dominated by two critical events which have limited the world’s supply of grain and oil seeds and caused prices to rise in order to limit the demand for these potentially scarce crops. The first event was the La Nina drought which limited rainfall in Brazil and Argentina over their growing season this past November through February, and the other was Russia’s invasion of Ukraine in late February, which has caused chaos and destruction in one of the world’s key wheat and corn production regions. Soybean, wheat, and corn prices have all reacted dramatically to these events, but if analysts are correct, ending stocks have remained astonishingly flat. This is proof that price has done its part to ration demand.
In their February World Agricultural Supply and Demand Estimates Report, (WASDE), released about two weeks before Russian troops crossed the border into Ukraine, the USDA estimated that world wide wheat ending stocks at the end of the 2021 crop year would be 278-million metric tonnes, and Chicago July wheat futures were $7.65 per bushel. Advance the clock ahead to the May USDA Re- port, released after six weeks of war in a region responsible for nearly a quarter of the world’s wheat exports and Chicago July wheat futures were $11.70 per bushel and the 2021 world wheat ending stocks estimate had risen to 279-million metric tonnes. What it tells us as marketers is that the 50% increase in price was sufficient enough to slow wheat demand to the point that the world won’t run out of wheat.
The rationing of wheat demand happens in a couple of ways. The simplest of these is just to feed less of the crop. In situations where the wheat supply exceeds the flour milling demand, any questionable quality wheat can be utilized as an energy source in livestock feed. As wheat prices run up, it becomes less cost effective as a nutrient source and gets dropped out of ration formulas. We saw this happen in Ontario last summer and fall when an enormous amount of low falling number wheat was diverted into the feed market, but as prices have run up, feed demand has diminished, and the best market for this wheat became blending with 2022 crop and moving it into the flour trade.
Similar to the situation in wheat, the soybean market has also adapted to reflect the supply consequences of this past winter’s South American drought. Back in October of 2021, before Brazil and Argentina even started planting their soybean crop, the USDA had projected a soybean carry out at year’s end of 116-million metric tonnes world wide. Then came a drought that resulted in South America harvesting 20-million tonnes fewer soybeans than what was anticipated and world wide soybean carry out was virtually unchanged at 115-million metric tonnes. Ending stocks haven’t changed, but the price of a bushel of soybean in Chicago went from $12.30 in October to $16.80 in May. That 35% increase in soybean futures was enough to stall oil-seed demand to the point that global ending stocks are effectively unchanged by the reduction in South American production.
The reason that all of this matters to Ontario grain farmers is that the massive price adjustments that we’ve seen over the past few months are not a trajectory but rather an adjustment. Price has done what it needed to do in order to ration demand, and unless we have another major climatic or geo-political event to impact grain and oil-seed supplies, we should expect to flatten out here.
There are still going to be marketing opportunities for grain producers. The traditional seasonal weather markets of the early growing season have not yet wrapped up, so there is still some crop development worry to cash in on if you need to add to sales. The futures markets also have a normal amount of volatility in terms of hour-to-hour or day-to-day price swings. Expecting the futures market to sit still would be as futile as expecting a 2-year-old to sit still through church, but like that fidgety child, don’t expect the movements to be consistently in any one direction.
Steve Kell operates a crop farm in Simcoe County and is a former grain merchant for Parrish and Heimbecker Ltd.
