Rationing Demand: The Question Is When, How and If?

I had a colleague of mine suggest to me the other day everybody should build bins.  I said, what build bins for $7 corn and $15 soybeans, hoping that they’ll go higher!  I climbed down from my perch long enough to save face.  However, with these prices staring you in the face, building bins is about the last thing on my mind.  I think I’d rather have a time machine to spring forward toward harvest.

For months now I’ve been writing about commodity prices being in the stratosphere.  For instance today new crop corn is about $6.75 bu, new soybeans are about $14.10 bushel and old crop wheat $7.19 per bushel.  Basis values continue there un-Canadian negative like tone.  The Canadian dollar was at .9880 cents US as I write.  Oil closed at about $140/barrel.  The crop in Eastern Canada has adequate rainfall, parts of Western Canada are dry, and some others are not.  The question is when are we going to wake up from this dream?

I must admit I’m a skeptic when it comes to the paradigm shift we’re told is going on within the grain markets of the world.  However, I’ve been wrong many times about the grain markets and I have the sales to show for it.  Needless to say, going forward in 2008 our US friends are moving ahead with one hand tied behind their production back.  The wet, sloppy, conditions in the American Corn Belt have surely taken their toll.  It was bound to happen.  It’s unfortunate, but it also should serve as a lesson to those within our agricultural markets who aren’t used to the fickle nature of food production.  As farmers we make plans, and generally they come to fruition, but you never know when Mother Nature has a different idea, like an eight-week series of rain-drenched thunderstorms across the American Midwest.

In Canada this should provide a myriad of agricultural opportunity.  However, the commodity boom has created its own set of challenges.  The question is where do we go from here.

That’s like saying; I think I see the pot at the end of the rainbow.  Most of us can’t get there fast enough.  Needless to say in the back of everybody’s mind there is the question of how we’ll be able to afford this next year.  The farm input price index must be going off the charts.

The commodity boom is surely sending chills into the greater Canadian economy.  For instance our new friend Bank of Canada Mark Carney (our old friend was former governor David Dodge) surprised Canadian markets last week by holding their key-lending rate to 3%.  Most economists were expecting the Bank of Canada to fold that rate by 25 basis points, but no.  With the Eastern Canadian economy on the ropes, Carney was widely expected to push some slack into the economy with an interest rate cut.

He answered his critics recently in Calgary Alta, saying in part that the Bank of Canada was focused on keeping inflation at 2%.  He said that Canada was caught up in a “commodity super cycle” and he said this price shock is no time for complacency.  Some people especially in Eastern Canada might think foregoing a quarter percent drop in interest rates is being complacent.  Needless to say the economic gulf between Western Canada and Eastern Canada makes Carney’s job very, very difficult.

Back on the farm many of us are still wondering when end users are going to exit.  As commodity futures have gone up we all know basis has gotten real ugly, to point where our whole “futures and basis” price discovery mechanism is no more.  Into this environment cattle and hogs need to be fed, ethanol plants need to efficiently produce ethanol to keep this whole cycle going.  So when are prices going to suddenly ration demand?

Clues might be found in Prince Rupert, British Columbia.  That’s were Canpotex Ltd announced recently that they are building a new export terminal in order to ship high demand potash from Saskatchewan doubling their capacity from 23 million tonnes annually from 12 million.  For those of you geographically challenged Prince Rupert is about as close to China as you can get in Canada.  That sucking sound is the whooshing of agricultural commodities set to go through Prince Rupert onward to Asia.

So maybe that means no rationing demand as we’ve come to expect it.  Maybe it’s what we’ve been waiting for.  The bottom line is like no other time in my career, there is not a good road map moving ahead.  At these price levels things are in flux.  The road to pay day has never been easy.  However, this year you need to go for broke.