Alberta Bound: “Market Volatility and Our Changing Agricultural and Political Environment”

USDA BullishNext week I make my way back to Western Canada.  I will be speaking on the topic of “Market Volatility and our changing Agriculture and Political Environment” to the Association of Alberta Agricultural Fieldmen at their provincial conference in Edmonton, Alberta.  This speaking engagement was planned over 18 months ago and who could have ever believed that I would land in Alberta at a time when there has been an explosion of volatility in agricultural prices.  Who knows, it might be Karma.

You can call it many things, the mother of all USDA reports or what about the most important USDA report in my lifetime.  I heard both of those expressions over the past month as the January 12 USDA report loomed in the distance.  The hype has frankly become too much for me.  My colleague Darin Newsom called it the Super Bowl and the Daytona 500 put together.  I quickly sent a message to him suggesting that as a Canadian maybe we could add the Stanley Cup finals to that.  When the USDA announced the numbers from the January 12 crop report, it seemed the whole agricultural world was watching.

The USDA dropped the corn production number down to 12.447 billion bushels dropping average yield to 152.8 bushels per acre.  Ending stocks for corn were also dropped to 745 million bushels the lowest since 1995/96.  Corn usage for ethanol was raised to 4.9 billion bushels with feed use dropping 100 million bushels.  Soybeans were also cut down to 3.329 billion bushels with average yield being reduced to 43.5 bushels per acre.  Soybean ending stocks were cut back to 140 million bushels putting soybean-ending stocks at 4.2%, the lowest on record. The only bearish needle in the haystack was wheat acreage was actually increased.

The market reacted violently in a bullish way as soon as the report had been digested.  I just so happened to be speaking in Woodstock and Chatham about grain prices the day before and after the report.  With grain prices getting very high the question I was asking producers was, “is this bullish?”  In other words we all know that at a certain point the world will shut down buying agricultural commodities.  When will that price level come, and what happens next?

I always like to quote my favorite refrain.  It goes something like this.  “I don’t know.”  We have been bullish in the grains since the July 4th weekend of 2010.   What the USDA said is that we need a lot more of everything in 2011.  At the present time consumption is outstripping the available supply of corn and soybeans.  Almost every agricultural commodity is demanding acres in 2011.  There are some US analysts who are talking about 8 to 10 million more acres are needed to satisfy this demand in 2011.  I cannot see how that is going to happen, unless prices for corn and soybeans go much, much higher.

The reason that I say that is I find it hard to believe that we can supply what the world is demanding at present price levels in 2011.  I cannot see how we can improve production that much in one year.  So that leaves the specter of getting into a pricing scenario where prices go so high demand is destroyed.  To me that is a very real possibility at some point in 2011.

It is almost like there is a perfect storm on the 2011 horizon mixing food and politics.  In this case it is probably not a good thing if you are anything else other than a crop producer.  In the past week there have been food riots in Africa as well as similar movements in parts of Asia.  In Bangladesh, where I have lots of experience food prices have tripled as people cannot afford it.  Is it our fault here in North America?  I don’t think so but you can see the politics churning at higher levels.  Widespread political unrest around the world regarding food will not be tolerated.  The hard part for these governments is getting out of the perceived mess that they have gotten into.

You could make an argument that agricultural markets got us to where we are today with these tight supplies.  Or you could say it was simply terrible 2010 weather that got us here.  Add the noncommercial speculative funds into the mix and it is just made it that much more acute.   The USDA has been writing this story for months now.  Interestingly enough, all along, we thought we knew what volatility was all about.  Now as I head toward Edmonton, it’s a whole new game.  In the months ahead, volatility and violent price movement will surely be redefined.