Canadian Grains: This Is Not Your Father’s Market And Maybe That’s Not So Bad

     Let’s just say if you read Sr. DTN Grains analyst Darin Newsom’s column last week, “The Rip Van Winkle Reaction”, you will know where I’m coming from.  Yes, I have been to Maui and have indulged at the Lahaina Fudge Company for real.  However, unlike wheat my friend Darin intimated, I wasn’t in a confectionery-infused paradise as I watch the November soybean contract go down a $1.24 a bushel since last Friday.  That’s certainly spoiled any fudge party I was thinking about.  When our noncommercial speculator friends decide to get out, it almost seems like there’s a trap door that can’t be shut.

Meanwhile the nonfarm media in both the United States and Canada has story after story about the 2012 drought and how that might affect food prices going forward.  There is a saying in farm country that when the urban media picks up on a drought/high prices story, the top is in or rain is on the way.  The precipitous decline in soybean futures since Friday, plus welcome rains across much of the Corn Belt, has certainly put credence to some of those thoughts.  However, rain is too late for most of the US Corn Belt, it’s still hot as nuclear hell in many of those fields, the damage is done.  Despite that, prices have been moving south even though grain fundamentals are strong.

It’s at times like these that I remember something my late father told me.  He always said that the agricultural commodity market made no sense.  He said it made no sense in the 1950s and 1960s and it made no sense in the years just before he passed away in 2010.  He always maintained that the stock market, the equities market, the bond market or any non-ag related commodity market made much more sense and was much easier to make a few bucks in.  So I laugh out loud when I think of his sayings over the past few days as agricultural prices seem to go against the parched crops in the field.

Of course my dear father was a master at growing all those agricultural commodities.  Needless to say, if he were here he’d be saying it makes no sense anymore than it did in earlier times.  Regardless of the way you feel about that, market action over the last several weeks has challenged many Canadian farmers to lock in prices at profitable levels.  Where at one time some market analysts were saying we should hope for $4.50 corn, Ontario farmers have had the chance to lock-in $5, $6 and $7 corn off the combine.  This agricultural commodity market might make no sense according to my late father, but then again, this is not my father’s market.  The new reality in agricultural markets is extreme volatility.

So is our futures market something to celebrate?  As many of you know I have always been somewhat of a critic of Canadian price discovery as we rely on an exchange in a foreign country to set the prices for grains in Eastern Canada.  I’ve always thought that it is an admission of failure that we at least don’t have some type of comment on how this is done.  Despite that, I am a realist. I spend much time now analyzing agricultural futures markets for the Grain Farmers of Ontario and the system that we have for that price discovery does make sense.  I don’t think I would celebrate it because there is still too much MF Global and PFBest to go around.  However, sometimes I feel as Canadian farmers we still don’t get it.  Yes, this is not our fathers market, so we better study it carefully and make sure we understand the new foundations of grains and how they are priced.

Our speculator friends are certainly a very large part of that.  I often refer to them as Pinstriped Pirates or those dirty speculators and so on and so.  However, I may have believed that at one time but I do no longer.  In my mind the speculator is willing to accept the risk that we will not.  Some of you may want to visit the Niagara or the Windsor casino and accept the risk that you may win the big prize, even though the house always wins.  In the grains market, the speculator wants to make more and more money and will often accept the risk that you will not.  With $7 corn available off to combine in Ontario over the last week, you’ve got to hand it to our speculator friends.  Compared to the old days when major grain companies held too much sway, there are new sheriffs in town and this is a good thing.

This past week I was asked to write a testimonial about placing wheat in the Grain Farmers of Ontario Wheat Pool.  I gladly did that, even though pooling may have lost some of its luster.  However, I know that in this frenetic volatile extreme agricultural commodity market, it has its place.  So too does flat pricing for grain as well as hedging and standing orders as well as many other things.

Key though, is taking command of your pricing environment.  Despite the extreme volatility in these grains market, there is also great opportunity.  In fact, sometimes there is more intraday volatility in some soybean contracts than there used to be all year.  Yes, this is not your father’s market and maybe that’s not so bad.