It seems counterintuitive, but sometimes uncertain crops make for uncertain markets. It seems that a key feature of spring seeding and the early summer in Ontario crop production has been a lot of concern about wet fields, slow planting progress and exploring the rules surrounding unseeded acreage benefits. Yet cash grain prices seem to have slept through what should have been ample fuel to power a rally. So how did the market miss the monsoon that was spring seeding 2017?
Part of the price’s failure to react to a tough start to the growing season was that Ontario is a very small piece of a very large world production area. Ontario’s corn and soybean production makes up about 3 per cent of the North American supply. If you can imagine some old fellow who farms 100 acres, and got 97 of it in on time, and the last three acres were a bit of challenge, that’s the relative impact of Ontario’s tough spring on the continental supply.
On a personal note, it was tough for me to take a 10-day break for spring seeding in early May while the fields soaked in rain, all the while watching weekly U.S. weekly planting progress reports showing American farmers at or near the five-year average for planting speed. It would have been reassuring to see a larger area share in our problems, but that wasn’t to be this year.
It takes assurance of supply in order to make a market confident enough to execute business. In the same way that a farmer is unlikely to forward contract soybeans if he can’t get them planted, an exporter is reluctant to sell a vessel load of soybeans if the farmer won’t sell them to the terminal. Ultimately the market stalls, stopping everyone from doing business.
This is particularly true in the wheat business. Ontario produces about four times as much wheat as the flour millers require annually. This means that millers never really have to panic over supply unless it looks as though only a quarter of the crop is going to make grade. The demand side engine to power wheat prices higher is export opportunities. These sales are made based on guaranteeing protein, falling numbers and vomitoxin levels in the wheat.
When it rains every other day while the wheat is heading, flouring and filling, those are impossible things to be confident about (especially in a year when we have such a high risk of secondary fusarium infections due to the weather). The uncertainty over what type of wheat quality the marketplace might have to sell actually stops traders from selling anything. The good news is that there is a market for every quality of product. Once enough of Ontario’s wheat is harvested, there is a sense of confidence about where this crop can go, pipelines to the various end-use point will develop, and basis bids will come to reflect real end-user demand.
The same uncertainty is weighing on the soybean market. At this point, nobody is 100 per cent certain how many soybeans actually were planted. There’s clearly some extra soybean acres due to longer-season crops like corn not being planted, but there’s also some fields that aren’t going to be planted at all this spring.
There’s potential that we could see reduced yields from late-seeding dates, or drown outs, but if the weather finally decides to cooperate, we might also see good soybean yields on a larger than planned acreage. As the market comes to grips with the answer to those questions, there will be a greater sense of confidence in the way that bids and offers play out.
The marketplace isn’t cowardly, it’s cautious. As soon as the weather moved us out of the pattern of the predictable, the potential to guess the supply side of the Ontario grain market wrongly went way up. If growing conditions cooperate for the balance of the year, there’s still the possibility of reasonable yields but at this point it’s far from assured.
If you’re waiting for the futures prices to rally significantly based on the backward spring, bear in mind that we’re at the last three acres in that old fellow’s 100 acre farm. Ontario basis has some capacity to bounce based on our local supply issues, but ultimately Ontario is a grain exporter, so we can’t stray too far from the world market price.
Markets pay for risk. Waiting until it’s certain that most of the crop has made it, won’t return you the highest price. The trick is for each person to figure out their own personal appetite for risk, and sell on the days that frightens him the most.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.
