One of the most startling things about 2022, is the number of severe droughts in the world. Look at a world drought map and you’ll see that significant portions of the U.S. south west, nearly all of Europe, and the Oinghai and Gansu regions of China have all suffered from a noteworthy lack of rain. Crop yields are certain to be reduced.
Weather problems for other people is generally considered to be good news for farmers hoping to see commodity prices rise, and the fact that this year’s droughts have occurred in areas with substantial agricultural production, and relatively wealthy populations, suggest that there is a high likelihood that markets will react. The question that Ontario farmers need to wrestle with is not if prices can remain strong through this fall and winter, but rather how to set reasonable and realistic targets for crops as this market unfolds.
The sky is not the limit.
In times when global grain market prices are certain to rise, a certain percentage of the farm community start to believe that prices could just go up and up in an endless trajectory. This is clearly not the case. In fact this past spring and summer Ontario grain farmers saw a real-life example of what happens when prices get too high.
Through April, May, and June of 2022, Ontario loaded a lot of corn onto export vessels heading out into the world market. With corn exports out of the Black Sea stalled due to war, and a little bit of seasonal weather anxiety pushing futures markets, corn values delivered to the export terminals rose up to levels over $10 per bushel… and then the whole thing stopped dead.
The biggest reason why corn exports out of Ontario came to a sudden stall in June was because we simply priced ourselves out of the market. By mid-June, recently harvested corn in South America was $25 per tonne cheaper than Ontario corn. The bulk of the export buyer interest shifted to Brazil and other places with cheaper corn.
Cash prices for corn in our marketplace fell significantly through July, and by August there were a few more export vessels loading in Hamilton because we’d come back into line with world market values. International demand for corn didn’t go away. Our customers did.
The trick in mapping out your crop marketing plan for the balance of the crop year is not to focus on the areas of the world that have a supply problem and need to buy grain, but rather to focus on the regions of the world which compete with us to fill that demand, and pay attention to what their prices are.
If you drove into a small town in Ontario that had two service stations on the main street, the gas station which has the most cars lined up at the pumps is the one with the best price. Gasoline is a commodity. Much like corn or soybeans, there’s not a lot of brand loyalty, and as long as buyers believe that they are getting a product of similar value, they’ll choose the best price place to get it.
Sticking with the gas station analogy, the USDA’s Weekly Export Sales Reports are a great way to monitor how long the line-up of cars are at the gas pumps. If weekly export sales are ahead of their expected pace or rising week over week, it tells us that more customers are choosing to buy in our market. Essentially, it is telling us that more cars are pulling into our service station. If weekly export sales pace drops off, it suggests that buyers have found someplace else to make their purchases, implying that we are no longer competitive with other suppliers. If we get into that scenario, prices need to drop in order to bring demand back.
With so many areas of the world having weather-related crop production problems in the growing season of 2022, there’s no question that demand for agricultural commodities will be strong. Expect to see stronger than normal demand for feed grains in Europe.
Due to this summer’s drought, EU corn yields for 2022 are forecast to be 15% lower than last year and 10% below the five-year average.
The question is not whether or not there will be strong markets for our grains and oilseeds over the coming year. It’s a matter of keeping our price expectations in line with our southern hemisphere competitors.
It’s a matter of looking east for markets and south at prices.