Our War Time Markets Keep Boiling

It is that time of year again in southwestern Ontario as combines start to roll through soft red winter wheat fields.  Hopefully by the time that you have read this, I’ll have mine off.  It was a tough year for getting wheat planted last year and I hope this year I can get many more acres in.  We just found it sweet spot this year based on higher prices coming exclusively from the war in Ukraine.

Of course, it is very hard to tell exactly what is going on in that area of the world. Ontario and global wheat prices have fallen over the last two months as the spectre of a war in a major wheat producing region has been relegated more to a default position in grain markets.  On social media over the weekend, you could find Ukrainian wheat fields being burned by Russian soldiers with combines in the field. It’s always said the truth is the first casualty of war, but those pictures certainly brought it home.

Of course, we are wishing for much less drama in Ontario’s wheat harvest this summer.  It would be so great if we could predict the future but of course we cannot. If you go back six months ago there was rumors of war in Ukraine, but the guns had still not gone off. We had stable interest rates, stable gas prices, stable commodity prices at what we thought were higher levels and then the whole world broke loose over war. It is like the ground shifted underneath us and that is especially true when it comes to interest rates.

The Bank of Canada this week raised their lending rate by 100 basis points last week. This is in an attempt to make capital more expensive and to put some type of brakes on inflation which is currently running at multi decade highs.  Inflation had an annual rate of 7.7% in May, the highest since 1983.  Farmers of course, know very well what the price of nitrogen has done over the past six months, and it is also rocked fixed farm asset prices as the world looks for certainty.  Raising the interest rate will back up on every farm in Canada whether you are borrowing money or not.

The low interest rate here of the last few years changed everything. Essentially, money became more like a commodity and with the latest infusion of capital to help with the Covid pandemic it was like piling on.  As it is the move by the Bank of Canada and other central banks should have the effect of cooling this warm pool of capital. This should mean that housing prices will go down as well as farmland prices. When you restrict the amount of capital that is available, fixed farm asset prices should get adjusted down.

The question is will it?  It seems far-fetched after such a long stretch of unmitigated growth in fixed farm asset prices.  For instance, many of us in Ontario farm country cannot imagine how high Ontario farmland prices have risen over the last 10 years. That might reflect how unknowing some of us were regarding this phenomenon. I certainly was. Needless to say, I was part of the generation that saw inflation crushed with 20% interest rates and farmland being reduced 25% over a decade.

That just makes me old, not necessarily wise. Over the years I have felt that even though that affected me overtime in my farming career those times likely would never return.  I still believe that, but we might have variations on the theme. Wartime markets were never a thing over the 35 years I’ve written this column.  The present war in Europe has been an incubator of terrible economic problems affecting almost everything everywhere including interest rates and energy prices.

It has put us in a bit of a pinch politically and economically. Take for instance the climate initiatives that almost all western governments have been initiating over the last few years. With the start-up of the war, we have seen energy distribution disrupted and energy prices spike. In fact, this winter we could see Europe freeze in the dark. There are people asking the question should we reembrace fossil fuels and drop climate initiatives? This past week in Holland we have seen huge farmer protests over divergent views on government regulation of agriculture partly related to climate initiatives.

Looking ahead, it just makes things more challenging. I haven’t even begun to talk about the lack of rain in many Ontario fields.  I know many of us were hoping 2022 would be easier than the year before and the year before that. Who knew it would be so challenging?