Once upon a time ago, I had a regular radio commentary in southwestern Ontario. It was a good gig, giving me the opportunity to hone my skills in radio land and talk about the economics of agriculture. It was also privilege because I knew I did not have a license to scream fire in a crowded theater. So as crops burn up in the United States from one of the worst droughts since 1988, I find it extremely interesting how the mainstream media has caught up to what is going on in the heartland. It is like the sky is falling.
In many ways it is just a reaction of non-farm journalists talking about problems in farm country that they have no idea about. Clearly, the drought of 2012 has become such a big story that many people in the mainstream media are piling on. Interestingly enough, many Ag market analysts say when the mainstream media catches up to a drought story, and then the market top is in. It would seem that in 2012 that is not the case. Dry weather seems to be spreading into the Western Corn belt as I write.
It is quite a marketing challenge for Ontario farmers. At the present time wheat is close to $8 a bushel, new crop corn is almost $6.50 off the combine this fall and new soybeans are almost $15. I had to laugh tonight because somebody asked me on Twitter when to sell. My standard answer is I don’t know but of course how could you be wrong selling into this market. We are talking all-time highs territory for new cash grains in Ontario.
So how do you hedge these profits? Well, there are several ways to do that but on the other hand I think hedging agricultural commodities has become so much more difficult. Should you hedge capital flows from Europe, should you hedge the Canadian currency or should you hedge agricultural futures based on supply concerns and selected hunches? Or, are flat cash prices king, damn the torpedoes and contract the crops at flat prices which are profitable? This surely is a challenge for many Canadian farmers who find themselves in a grain market, which is intent on not acting like one.
Of course I am talking about the noncommercial speculative interests that have made the grain market so much of a different animal over the last 6 years. They have made it so unpredictable; it is hard to hedge against them because the rules are so different. Interestingly enough, last week the USDA chimed in with their July report that was a bit retro, as it dealt a blow to both the supply and demand for grains. Our noncommercial speculative friends surely sat up with interest.
The big news was that USDA actually reduced US corn yield down to 146 bushels per acre from its earlier estimate of 166 bushels per acre. That was a 12% reduction in one month, something I did not expect until January of 2013. The soybean yield was reduced to 40.5 bushels an acre down from 42.3 bushels per acre that the traded had expected. These were supply shocks to the market, which were coupled with a reduction in feed demand of 650 million bushels, lower corn usage for ethanol and reduced exports. Simply put, the US drought is making the USDA scramble to ration the crumbling supply and the shaky demand.
There has also been much talk about comparing the current hot and dry situation to what happened in 1988, which has become the benchmark for all droughts. I was 29 years old at that time, had a crop in the field and several mortgages on land that I bought. My crop sizzled up into dust that year; it is something I will never forget. In Ontario, luckily, we are not even close to that yet. However, it’s pretty clear in the US Corn Belt we are moving in that direction.
When I speak on the grain markets, I go through all kinds of factors that will affect the price of corn wheat and soybeans. Nevertheless, I always talk about a mythical unexpected event that comes along on some unexpected Tuesday, which shakes the market to the core. Usually, it is a political event, like a war or an embargo, which hits the market blindsided. This year it was none of that, it was simply the known fact that it was getting dry in the US and now that has turned into a cataclysmic weather event. The question is, what happens next?
Well, someday it will start to rain. Some areas that are not so bad will get it and we will muddle through. But make no mistake as we stand here on July 12th. The unexpected Tuesday, which was just cheap talk last winter, is now here. Demand and supply for grains cannot be measured now. When the rains start falling, maybe then we can assess just where we are.