Farm Credit Canada Grains Volatility Tour: We Are All Vulnerable

     Getting into the head of Ontario farmers can be intriguing.  I have had that opportunity over the last 3 days as I just completed a 3-day, 5 event speaking tour with Farm credit Canada.  They had asked me to become part of their learning series earlier this spring and that culminated with a tour through southern Ontario talking about grain prices.  I visited Essex, Florence, Tillsonburg, Listowel and Walkerton Ontario.  I surely also got my eyes opened with the damage to the Ontario crop.  The drought in 2012 certainly took no prisoners.

It is interesting speaking about the grains when they are fluttering around record levels.  For instance what do you say to a crowd who are prepared to store $8 corn into the New Year?  What I told them was at these record price levels we are all vulnerable.  The question is, at what price level will the buyers stop buying?

Of course I don’t know the answer to that question but I do know that we are at record levels for grains and that’s good with me.  The big challenge for a lot of people was having a crop to sell.  This is true across the American Midwest but it was also true across the stretch of southern Ontario I visited over the last 3 days.  Corn and soybeans were parched with much drought induced ripening east and north of London Ontario.

At almost every venue, which I spoke at I got one consistent question about a non-agricultural commodity. I kept getting questions about the price of natural gas.  As you all know natural gas was so cheap last summer that it was almost free.  The question came up how would the lower prices of natural gas affect fertilizer prices.  At these record price levels for grains is fertilizer going to cost us more next year?

I answered that question a couple ways.  Basically, I said that potash would probably be a lot more money and most likely nitrogen and phosphorus will be up from what they were last year.  Potash is mined by a monopoly so you can see that coming.  I didn’t think natural gas prices would have that much effect on the price of nitrogen.  Corporate pricing behavior should take over, milking the last dime out of the guy who is buying nitrogen.

For many of the farmers who are producing grain it is the best of times.  However, for those that are producing livestock it is not so good. For instance, I had one poultry farmer tell me that he was very concerned about the price of soybeans and soybean meal.  He had not locked his in yet and of course he had soybeans to sell as well.  So the rising grain prices have been a significant double edge sword for him.  I also visited a large beef feedlot in Bruce County where these feed costs were being mitigated by hedging and other means, which meant that the higher feed costs were more a speed bump to the path of better beef margins.  Combine those folks with people who didn’t have a crop to sell and the story is a very much mixed bag regarding these higher grain prices in 2012.

The FCC learning event tour also changed your loyal scribe.  All year I’ve been talking about an Ontario corn yield of 148 bushels per acre.  However, when I presented I was using the Statistics Canada number pegging Ontario corn yield at 136.7 bushels per acre.  With Ontario planting about 400,000 more acres in 2012 to corn than in 2011, even with that reduced yield, these numbers multiply out to more corn on the ground in 2012.  Needless to say, I began to openly question whether the 136.7 bushels per acre was making any sense.  With hot weather continuing to inundate Ontario, many cobs are dropping off those droughty corn stalks.

There are so many unknown variables ahead.  For instance, I was asked many times whether I thought the USDA would reduce yield further on both corn and soybeans.  The harvested acreage could change.  Chinese inelastic demand for soybeans continues.  What will be the luck of the draw for the South American soybean crop, which will start going into the ground on September 15th?  What implications does this have for new crop corn next year when our American friends will have to reach for the seats?

It is truly an unprecedented time in the grain markets.  It was surely unprecedented for me to explain some of these Ag commodity prices when I used to do the same when they were half price.  Everything affects everything else.  Change is our only constant and the only thing that you can be sure of, is that we can’t be sure of anything at all.