Hedge You Say? See Russia/Ukraine Version 2.0

It has been a brutal period for some farmers within the great Canadian farm belt. Hurricane Fiona hit the Maritime provinces with a fury far beyond what many expected. A few years ago, pre pandemic I had the opportunity to speak at the Prince Edward Island Grain and Oilseeds conference in Summerside PEI. At that time, I put up slides from the damage from Hurricane Dorian, which was in the recent memory.  As Fiona bore down on the maritime provinces, I remember thinking here we go again. Many a DTN subscriber and many a Canadian farmer will see their crops blown away.

I made my usual contacts in Atlantic Canada and told them I was thinking about them as the storm bore down on their area.  As all Canadians know we saw catastrophic effects on the ground in Nova Scotia, Prince Edward Island, Newfoundland and Labrador and the Madeline Islands of Quebec.  In Prince Edward Island, the soybeans are mangled, but still might be salvageable but the corn is broken off and dead probably 50% black layered according to one of my contacts in the area.  As farmers, we know how cruel the weather can be.

Clearly, there is a lot of work to pick up the pieces of Atlantic Canadian agriculture. All levels of government are pledging support, but it is also a difficult and daunting task.   I wish my farming colleagues well as they pick up the pieces of their lives.

Back in southwestern Ontario your loyal scribe actually got to harvest soybeans last week. The yield was about as expected in such an arid summer, but it was certainly nice to get driving through a soybean field to get things done quickly followed up by planting wheat. Now, I’ll continue to look for good weather conditions in order to get the rest of the crop in the rear-view mirror.  Thankfully, the remnants of hurricane Ian are not expected to reach southwestern Ontario.

As I write this tonight, I am anticipating the release of the USDA’s quarterly grain stocks report for September 1st, which will be released this tomorrow. (Friday) Earlier, the USDA had predicted 1.525 billion bushels of corn and 240 million bushels of soybeans to be on hand in September.  We do know that sometimes the USDA can find grain and lose grain at the same time or vice versa. In fact, all kinds of information can pop out of nowhere in these September 1st numbers. It will certainly give the market something to chew about as we go into this weekend.

In 2022, some of you might argue that a few changed numbers in USDA reports might seem calming compared to some of the gyrations that we have seen this past year. It is no secret that geopolitics have been extremely important over the past few years when it comes to price discovery for grain. However, when Russia invaded Ukraine on February 24th of this year it seemed like we reached a new level of geopolitical grain price volatility. I’ve been thinking about this recently and as I look into the future.

When you write about grain prices sometimes you get asked questions about almost anything and this past year, I’ve been asked more than once about conspiracy theories and military strategy in Ukraine.  With regard to the latter, I always answer people by saying I’m not a military analyst and nobody is in the grain analyst genre. Expecting me to know how a military campaign is going on the other side of the world is a non-starter. I don’t know and even attempting to answer that question which has been asked to me by members of the press would cheapen my commentary.  Let’s just say that wartime markets add a lot to price volatility. If you want to know more about the war behavior in that part of the world just read your Russian history. That will give you some good clues.

This past week I got two phone calls from farmers asking me about popular conspiracy theories in some far-right wing political circles concerning the World Economic Forum.  I responded by telling the farmers anything concerning that was pure garbage and I had nothing more to say about it.  Then at the end of the week the world woke up to what seemed to be sabotage at the Nordstream underwater gas pipeline near Sweden, which feeds Europe Russian natural gas.   The Russians have responded to this by saying these acts of sabotage will benefit US natural gas interests. Who knows what the truth is?

I certainly don’t. However, increasingly I have felt that we might be going into wartime markets 2.0.  Last winter when the invasion was launched by Russia, we had huge upside volatility in grain markets. As I look ahead into this winter with the energy noose continued to be shortened on European gas consumers, the future seems very tough. At the same time the Russians have expressed interest in ending the Ukrainian grain corridor at the end of the agreement in November. The Turkish leader is trying to calm the situation and get it extended. Needless to say, it doesn’t sound like peace is breaking out all over. It sounds like things are getting worse. How is our grain market supposed to respond to a situation that looks increasingly untenable?

Hedge, you say?  Well, risk management never grows old, but we are in a brave new world, and I do believe version 2.0 of the Russian Ukrainian war could get a lot messier.  Brazil agriculture in 2023 is being looked on as a panacea to solve many of apparent supply related problems. However, if they get the same crop as last year and Mother Nature does not play nice it will spawn a new volatility which could be much greater than last year.  I’m just saying.  I don’t see Kum Ba Yah