Canadian Cash Grain Prices a Mirage, Our Risk Profile Increasing

It is raining now near Dresden just as I was about to start combining soybeans.  So I hope it is not an omen for things to come.  After a pristine 2015 fall season, I was hoping for a repeat in 2016.  In fact, today in Essex County, which is just south of me, they had 125 mm of rain in Tecumseh Ontario flooding adjacent farm fields.  It was a once in 100-year weather event.  So far I have been spared, but it certainly is a close call.

That rainfall example is just another instance of how much risk that we accept as farmers.  While last year it seemed that we had all fall to plant wheat, this weather is already putting many Ontario producers behind the eight ball.  Risk, it would seem, is our middle name.

Of course, you could argue that is nothing really new.  This morning I had a conversation with a local farmer who was also my high school classmate.  We have worked together through the years from time to time.  He has some big equipment and increasingly I hire him to do some of my jobs.  It is a good relationship and because of our high school experience together there is always something to talk about.

This morning some of our talk harkened back to the days we started farming with 20% plus interest rates.  We talked about how crushing it was.  Of course 30 years later we asked ourselves how we ever got thru it.  Listening nearby was a younger fellow, who said, yes, but you guys never had to buy a combine for $700,000 plus!  We both looked and said, yes, it’s so very different now.  Needless to say, that $700,000 dollar statement was a showstopper for me.  I didn’t really know how to react.

In many ways, it is a reaction to low interest rates.  At those 20% rates in my past, any fixed asset’s value was pounded in the ground.  Capital was extremely scarce at the time.  However, in 2016, with low interest rates, fixed assets values like equipment (and land) aren’t so much.  So you get to pay for that $700,000 at 2-3%.  It’s just different now, not necessarily easier, just different.

It was an interesting thought process for me, especially when we take the value of our grain prices being so low. We are range bound with our grain futures prices with corn at $3.28 and soybeans and $9.45 a bushel.  The Canadian dollar has changed everything on this side of the border making soybean cash prices off the combine at $12 and corn at approximately $4.25.  Those price optics are significantly better than our American friends who face sagging cash prices in the $8 range with corn sub $3.  Essentially, in the United States it is increasingly a time of decreased profits and losses in many cases.  Throw some catastrophic weather events in the mix like we had in Essex County today and you have real money being lost.

Those low interest rates may help American producers, just like they have helped us.  However, even that is growing a little thin in 2016 and 2017.  For instance today I read a report on the American agricultural economy from the Kansas City Federal Reserve Bank.  In the study, the Kansas City Federal Reserve said that the agricultural economy would continue to worsen in 2016 and likely in 2017 get worse.  This would be because many producers will be challenged to continue to operate after experiencing losses on multiple consecutive years.  The study said that many of these producers have been able to continue to operate because of short-term financing deals.  However if things do not improve in 2017 they might have to look at even more aggressive alternatives to shore up their depleted working capital.  It was actually quite a dose of reality given by the Federal Reserve Bank of Kansas City.

Of course that dose of reality would be accelerated if we had any type of interest rate spike.  However, there is no 1980s style interest rate spike on the horizon.  I do expect the US Federal Reserve to raise interest rates after the US election, but nothing serious.  Of course, I’ve even talked about negative interest rates in this column.  I don’t know what that will mean.

Meanwhile, back in Canada nobody is talking about bad times in agriculture.  One reason is because of our Canadian dollar and the other reason is in Eastern Canada our agriculture is dominated by the supply-managed sector, which is more immune to poor grain and livestock prices.  However, in the Canadian grain sector I talk a lot about our cash price optics being up, when essentially they are the same or worse and as our American friends in US dollar terms.

What’s that really means is our grain sector is not much different than what the Kansas City Federal Reserve Bank is describing.  It means that $700,000 combine is going to be a bit harder to pay for.  It means those short-term financing options have to get even more creative.  It means our risk profile as Canadian farmers is appreciating.  It means that the Canadian loonie is fooling us.  There is a bit of a mirage going on.  However, it’s nothing the futures market couldn’t cure with a good rally extended over time.  It would seem the whole world is waiting for that.