I am fully expecting an interest rate rise in the United States this fall. The American economy has been doing much better than the Canadian economy and I think the time has come for US Federal Reserve Chairman Janet Yellen to raise interest rates. However, I have told everybody that interest rates so low like this don’t really make me shudder. My first demand loan as a farmer was a 23.25%.
That was unfortunate for me, because it was a very long time ago in 1981 and ever since it is been hard to get out from under that shadow. Things were hard then and there was talk of foreclosure all throughout Canadian farm country. The truth is that 2015 does not resemble 1981. Low interest rates will continue to act as the testosterone beneath the agricultural economy. Even though grain prices have retreated over the last 18 months, these low interest rates will let everybody find a way forward.
We got a reminder of that last week as Bank of Canada governor Stephen Poloz announced that the Bank of Canada was keeping its key overnight lending rate at 0.5%. The Bank of Canada governor who also metaphorically is my lost twin brother (just take a look at the pictures) talked about how the lower Canadian dollar and the healthy American economy were helping to offset some of the negative effects of the Canadian economy from lower commodity prices. The Bank of Canada kind of shrugged off the problems in China and at the end of the day I think these rock-bottom interest rates seem to be serving their purpose. When you are as low as we are now, there simply isn’t much more downward room.
Times simply aren’t too good right now and to a great extent, Canadian farmers know what’s saving our bacon. With futures prices sitting at $3.74 for corn, $8.77 for soybeans and $4.77 for wheat, its like its 1995. Needless to say, the Canadian dollar at the 75.5 US level makes for magic optics for our cash prices. It means a plus 80-cent basis for corn and a plus $2 basis for soybeans. It led one of my American twitter followers last week to say, he’d take my prices. I quickly reminded him our prices were American with an adjustment for foreign exchange. We all know that.
Big dreams here are made up of a futures rally with the weak loonie. We’ve had the weak loonie part of the equation for quite some time now. However, the grain futures part of the equation just won’t cooperate. Many farmers are looking to future USDA reports to bring the USDA back to its senses. However, be careful what you wish for. Those August USDA numbers might just grow bigger into January.
Of course, I don’t know. I really don’t know and in my opinion nobody ever knows. I’ve got a friend who predicted on August 7th that Dec corn would be from $5.00 to $5.25 within 30 days. He’s now maintaining that position but saying it’ll be $4.75-$5.25 by December 31st. Obviously that first prediction was a whiff, I hope he’s right about his year-end prediction. Despite those predictions, his research is very sound within the grain analysis business. Wet springs can fool people, but hot and dry can be devastating to crops. Simply put, it’s much safer to balance and debate market factors on the road to marketing our crops.
With that said we are on the doorstep of another USDA report. The USDA will release their latest numbers on Friday and of course there are expectations everywhere. Will the USDA reduce the corn yield of 168.8 and the soybean yield of 46.9 bushels per acre? Will they reverse the insanity, which was their August report? Or, as I have intimated many times will these numbers just keep growing in a year when market weather was benign even after the floods of early spring in the Eastern corn belt? Or, are we grasping at straws unable to imagine such monster crops when over the last five years we have gotten used to prices being so much higher?
The answer of course is that risk management never grows old. There was one shining opportunity to price crops back in June, but it does not necessarily have the monopoly on future prospects. Nobody knows what is ahead and those pricing opportunities could come back with a vengeance. That is simply the nature of agricultural markets. Complexity is the enemy of transparency and complexity can impede a marketing plan. Keep it simple. Our interest rates and our loonie are saving the day.