Part of our grain discussion is geopolitics. You know the deal, with Chinese demand for grain being so important. China is that big fat market, which can act insatiable at times. We saw that this past year, we all liked it and we want it back. However, we also know, when it comes to trade with China, there is a history that’s not so streamlined. It gets messy. In fact, as I’ve said many times in the past, Asia is not the most peaceful place at times. Surely in 2021 and 2022 we’re hoping for that insatiable grain demand from Asia and little else.
It’s hard to gauge just what’s going on in China. On one hand, soybean crush margins are poor as well as hog profitability. You’d think at first glance, that would be bad for grain demand. However, the view from many is grain demand will be robust as ever. I’m tending to be in the former camp. I cannot see the Chinese buying as much corn and soybeans as they did over the last year, because the stars aren’t quite aligned. Take into consideration the quadrupling and quintupling of container freight into China and you’d think it would back up onto our farms. We’ll see, for now, prices are still very buoyant. However, I cannot see the same effervescent demand for China which we saw last year.
I hope to be proven wrong. Demand is one thing, supply is another. The USDA estimating US corn coming in at 15.165 billion bushels based on a yield of 179.5 bushels per acre and soybeans at 4.405 billion bushels based on a yield of 50.8 bushels per acre. Those are big crops, which might have a wide standard deviation, but they are still big crops. Within those big numbers there are obvious production problems with drought in the northern plains, then all the drought induced lower yields in western Canada. Droughty canola I am told is like harvesting pepper and we don’t want to do that.
What I’m saying is it’s a big crop, but there is still room for problems. No rain in August, is not good for soybeans, which don’t have enough acres as is. The problems in the northern plains aren’t going to get better. Sure, the Brazilians will ramp up another record crop starting in October, so if everything goes well, the Chinese will have lots to choose from. However, it’s just a theory now, and until we know the weather going forward, price levels will be sustained where they are now, a good place for farmers.
That good place has caused quite a change in the agricultural economy. I had mentioned freight rates earlier. Whether its trucks or trains or ships, costs are higher. At the ground level, farm machinery is scarce. I talked with a dealer rep today for some precision farming equipment, who told me they could get some guidance equipment because of the shortage of computer chips. On top of that, farm machinery dealers are having trouble with inventory. You get the picture; things are tight right thru the agricultural economy.
To loosen things up you might need a lot more production or a lot less demand. We will see. China is often portrayed here in the west as a bit of a villain and especially so among grain merchandizers and analysts. I often hear people criticizing China as not being transparent about their grains supply and surely their grain demand. Often, I feel this criticism is a bit chauvinistic, the view from Asia is so much different. The same complaints can be found about our American friends in Asia. It’s just we don’t hear much about that over here. China is no boy scout for sure. With two Canadians in jail over there, every Canadian knows that. They need to come home.
I would surely like that, but we know its not so easy, especially with Huawei executive Meng Wanzhou still under house arrest in her Vancouver mansion. We also may be going into a federal election on August 9th and I’m sure that the China issue will be one of the issues debated. The Liberals have handled China clumsily, but maybe the only way they could. The opposition Conservatives have been much more hawkish but would probably react the same way as the Liberals if they had been in government.
Many of you surely have grain sold, and that’s ok. Many of you surely are measuring your potential yields to sell more and that’s ok too. Selling grain after harvest will likely be ok too. As it is, there is still lots of risk ahead, but surely a lot of demand too, even though currently, China is not showing its cards. As we head into August, that will surely change. The hard part is not knowing, but then again, there might be some rain for our soybeans. For now, that’s where we are and for now, that really matters.