Ontario Gets Planted, Not So for Western Canada, Price Volatility Heats Up

Ontario PlantedIt has been quite a week for our producers.  In Ontario, even though we are past mid June, corn continued to be planted in my neighborhood.  More than a few farmers were enticed into growing more corn late into June because of the high prices we have become accustomed to in the corn market.  Then, just when we had visions of $10 corn dancing in our head, the market tanks and we lose a dollar a bushel. And I hate when that happens.  As I’ve said many times, nobody knows what the market will do.

So I suppose a $1 a bushel drop in corn spells out volatility.  It was only a week ago that $8 corn was bringing all kinds of that commodity out of the woodwork.  There was talk of “running out of corn” as the nonfarm media did its best to be alarmist.  Add some good crop conditions into the mix with some European financial flu, and it didn’t take long for the froth to be blown off the beer.  Nobody said this year was going to be easy.  Marketing has surely been a challenge.

The market is still predicting 13.2 billion bushels of corn despite the fickle spring.  The June 30 USDA actual plantings report will certainly serve as a litmus test to future price movement.  However, as of now, it would seem like noncommercial money has a trap door under it, looking for a safe haven.  The US dollar has gained significantly over the last week.

So we shall see, or will we?  Increasingly, as time moves on, new technology will be available to measure just how good the crop is in the field.  You may remember last year, that USDA was roundly criticized for overestimating the 2009 and 2010 corn crop, before they started ratcheting those estimates down.  At that time there were many advisory services that were relying on different algorithms, satellite images and field reports, which disagreed with USDA.  At the end of the day, USDA was wrong and cynicism was right.  In the weeks to come you will hear much about how good this crop is in the field.  Knowing exactly who is right will be the big challenge for producers still looking to market their crop.

Unfortunately, there is some market intelligence this year that tells us things are not so good in Western Canada.  Who would’ve ever believed it would have happened twice in two consecutive years.  This past week the Canadian Wheat Board announced that Western farmers would leave between 8.25 million and 12.5 million acres unplanted.  This means that 1/5 of Western Canadian farmland will go unplanted for another year.  You might remember that delayed and abandoned Western Canadian plantings last year helped start the big Ag commodity run-up.  This year it just seems like bad karma.  Adding to the problems, it looks like canola will be down 5 million acres from what was expected.

Of course, as I said a few weeks ago, maybe it is our turn to give the grain market more buoyancy.  For instance I looked at my corn crop the other day and what was 200 bushel per acre when I planted is now top end 180 bushels per acre.  So I am working down from there.  If it’s ditto across the Eastern Corn Belt, there will be some major production shortfalls come this fall.  Despite all the investment money in commodities, tight fundamentals, especially for corn mean something.

One thing that we cannot control is the weather.  Yes, we are all experts at watching that.  However, this summer there is so much else, seemingly chaos butterflies floating everywhere.  Greece is a real problem because austerity measures aren’t going over very well there and default will cause the Euro real problems.  It might also lead to some countries like Germany not necessarily wanting to continue as the benevolent banker to all.  This type of economic sentiment means a flight of capital into gold and US dollars.  A higher US dollar is a negative for agricultural commodities.  So these macro Euro events may mirror the unfortunate insurrection that we saw in Vancouver the other night.  Capital will try to reach a safe haven and that usually doesn’t mean the grains.

Aside from those issues, Russia and India intend to export grain again very soon.  Mother nature has a tendency of evening things up around the globe.  At least as of mid-June 2011, it looks like it is their turn.  Western Canada may have to wait another year.  For the greater Corn Belt, there is lots of weather/production risk ahead.   Even after a $1/bu drops in corn, this is the year; we can’t afford a production hiccup.  Needless to say, it’s not all rosy out there.  More price fireworks will surely be on their way.