This afternoon US Federal Reserve chair Janet Yellen announced that the US Federal Reserve would not be raising interest rates. Senior DTN Grain Analyst Darin Newsom had tweeted me earlier in the day telling me based on his analysis that he did not expect a rate increase. I on the other hand, being the intuitive agricultural economist felt it was about time. In fact, I was wrong even though I was guessing and Darin was right based on some very good analysis of the market structure. That’s not going to happen every time, just most of the time.
Rewind back about 30 years. Your loyal scribe was visiting an agricultural economist friend in Canberra Australia. My agricultural economist friend was working for a agricultural economic agency of the Australian government on sheep marketing. I asked him about his work and he said that he could not understand that prices were highly variable in some of the country markets. In fact, they made little sense sometimes. We sat down together and I asked him all the usual questions especially about volume of sheep, etc. etc. At the end of the day I left not really knowing why that it happened, but I knew it was a question of market structure. There probably wasn’t enough sheep flowing to markets consistently over time. It was a question of market structure.
Some of you may have read that story before, I have told it over and over. Simply put, market structure is an extremely important component of understanding farm prices. Whether it is sheep or corn and soybeans, we as farmers must know how our grain is priced, where it comes from and where it goes, how it’s processed and the relative size of the market area. Without knowing those things, sometimes we may price our grain and completely miss profit opportunities.
The problem is it’s not a sexy topic. I’m always aware of that when I either write or speak about the markets. My background is as a farmer and an agricultural economist. So I love to listen to commentary about different markets and how they work. Some of it is technical, but at the same time it is highly relevant. Needless to say, at the end of the day it’s not necessarily sexy so farmers really don’t want to hear too much about it. However, I just can’t give it up that easy.
Take for example the US market for grain. In 2004, feed demand for corn was just over 6 billion bushels. In the same year ethanol demand was about 1.3 billion bushels. Fast-forward to 2010 and ethanol demand had jumped to approximately 5 billion bushels. Feed demand was approximately 4.9 billion bushels. In 2015 feed demand had rebounded to 5.3 billion bushels, while ethanol had dropped back to 5.25 billion bushels. So you can see how the corn market structure has changed. In 2004, we had about 7.4 billion bushels of corn demand from feed and ethanol and in 2015 we have about 10.35 billion bushels. The market structure has changed considerably and adjustments had to be made to maintain that structure.
That is a bit of an old story but it has significant residents everywhere. For instance when I am invited to speak on the grain markets typically I try to find out how the local market structure works. For instance two weeks ago I was in Québec and I mentioned the Québec grain market structure and their proximity to saltwater ports. This past winter I was in Prince Edward Island and I mentioned how they have to transport their grain to the nearest end-user in Québec or Halifax. That is simply part of the market structure. A year ago I spoke in Ottawa to the Western Canadian Wheat Growers and I learned much about the market structure in Western Canada, which is largely beholden to railroads, something you don’t see much in Ontario. Basis values for grain fluctuated wildly because of this and it’s very important to understand how it works in order to market your grain profitably.
The challenge is to figure market structure out. Usually that has to do with the quantity of supply, demand, market size, proximity to end users, geography, history and even sometimes like in the case of Québec culture. I have studied the Ontario grain market structure for years now and I’m still learning. There is nothing really written down. It is also a moving target. However, I will keep trying.
Of course, anybody with grain to sell needs to figure that out too. Some areas have distinct advantages in their geographic market structure (proximity to Mississippi R), other don’t, like the NW US corn belt and Western Canada. However, farmers thrive in all those places. It’s a case of understanding your market structure thoroughly and adapting your marketing plan to take advantage of it. Counting sheep sometimes makes sense.