Steve Kell’s
Market Minute
I’m going to start off with a confession. While contemplating potential column topics for both the January and February issues of Farmers Forum, I wrestled with the idea of a “what if” essay on how the grain markets might react if Russia made an incursion into some portion of Ukraine. The potential for such an invasion was already the elephant in the room, and we even talked about it at the Ontario Agricultural Conference in January.
Ultimately, I chickened out. The fact of the matter is that I cannot predict what Vladimir Putin might do next and it’s foolish to explore false scenarios if we guess wrong. The important part of exploring the Ukrainian conflict now is that the actions on the ground are now evident and the impact on grain and oilseed markets are both evident and paramount to planning our farm marketing plan for the balance of the crop year.
There are two key areas where the situation in Ukraine overlaps with Ontario agriculture. About 23 % of the world’s exportable wheat supply and 16 % of the world’s exportable corn supply originates in Ukrainian ports. Since corn and wheat are major cash crops for Ontario farms, the impact of this conflict is now directly tied to our market and pricing for local producers.
Our corn market has the clearest line of connection to the fate of the Ukrainian corn industry. Last year, Ukraine exported 10-million tonnes of corn to countries in the European Union. (That volume is basically the equivalent of the entire Ontario crop). While Ukraine also exported corn to China, Bangladesh and Pakistan, we want to focus on the European Union because those are customers who we can ship to fairly easily coming out of Great Lakes ports through the St. Lawrence Seaway.
In a good year, Ontario exports up to 1-million tonnes of corn. Some of that moves out in rather unspectacular fashion on trucks going to exotic destinations like Quebec, Michigan, or New York State, but a sizable portion of Ontario export corn loads onto cargo ships and heads to European ports where it typically competes with Black Sea competitors. If Ontario sellers could pick up even 5 % of the 10-million tonne market share that Ukraine is unlikely to be able to fill in 2022, that’s an additional 500,000 tonnes of corn or a 50 % increase in Ontario’s corn export demand.
To be clear, it is far too early to know exactly how much more corn Ontario might be able to export, but the math shows us that to be able to capture even a small portion of the demand which Ukraine won’t be able to fill could have a huge impact on Ontario’s corn balance sheet.
One thing that has been impressive to observe is how fast the Ontario corn markets adapted to the evolving situation in Ukraine. In the early days of the conflict, most of the Ontario export terminals were “no bid” for corn which made perfect sense considering that futures markets were extremely volatile, and corn traders needed to find additional vessel freight in order to even quote on new business. Those two problems were resolved quickly. Within three weeks of the first Russian tanks crossing the Ukrainian border, Ontario corn growers’ phones, texts, and emails were lighting up with offers of deals and opportunities for spring and summer corn movement into our export terminals.
The connection between Ukraine’s inability to participate in global wheat export markets and the pricing opportunities for Ontario farmers is a lot less linear than it is for corn. While it is obvious that wheat prices have moved up to all-time highs, it is extremely unlikely that we will see a big volume of Ontario wheat flowing out the St. Lawrence River in order to supply international markets that Ukraine won’t be able to serve in 2022-2023.
Ontario’s 2021 winter wheat crop has already been in the bin for more than eight months, and a full half of it is typically marketed even before it is harvested, so the reality is that most of the wheat harvested last summer has already been consumed or is at least committed to a sale. We also had some sketchy-quality winter wheat in nearly half of the crop, so an exporter would struggle to find a volume of consistent-quality old crop wheat that would enable Ontario to participate in the export market.
Our opportunity in wheat is the result of the chaos coming out of the Ukrainian conflict and how that impacts the Chicago wheat futures. May wheat futures were trading in a range between $8 and $8.50 for about two months prior to Russia invading Ukraine. Then, it spiked to a peak of $13.68 on March 8, a price increase of 60 % in less than 10 trading sessions.
Since that initial peak, wheat futures have eased back down to a level 25 % above where prices were in the winter.
The grain futures market moves were typical of what we see when a crisis arises: Rise like a rocket, then fall like a feather as the market reacts to risk, and then tries to find a new level of balance which takes into account the new supply and demand reality. The same price movement pattern will occur in petroleum products and nitrogen fertilizer: fast rise, slow fall.
Simcoe crop farmer Steve Kell handles grain merchandizing for Kell Grain, with elevators in Belleville and Gilford.
