Glacier FarmMedia COVID-19 & the Farm

Back to the future for grain price outlooks

Growers elsewhere in the world are still getting strong signals to produce more, AGR Brazil's Pedro Dejneka warns. (Gord Gilmour photo)

If there were any lingering doubts over whether the grain price party is over, a few hours at this year’s Cereals North America conference last week firmly laid them to rest.

Speaker after speaker set the scene for a melancholy outlook.

Stocks are at or near record levels for many crops, there is continued growth in production, and there is no clear picture of what might cause markets to turn the corner. Clearly the punch bowl is empty, the streamers are falling to the floor and everyone’s grabbing their coats and hats and hailing a taxi.

Global Grain Group (G3, formerly CWB) weather and crops specialist Bruce Burnett summed it up best during a panel discussion, saying it was beginning to look and feel a lot like an earlier stage in his career.

When he was in university in the late ’70s, the talk was all about feeding the world. Then it changed.

“In the 1980s and 1990s, you’d go out and give an outlook presentation and it felt hopeless — ‘There’s no light at the end of the tunnel, and if there is, run, because it’s a train,'” Burnett told the assembled crowd of grain marketers, market analysts and a smattering of farmers. “This is beginning to feel a lot like that.”

Neil Townsend, G3’s director of market research, said the industry is attempting to adjust to a post-ethanol world and all that entails.

“In some ways it takes us back to the period before the early 2000s, when we thought up ethanol,” Townsend said.

That period depended on massive government subsidies, and ethanol shifted that burden to the gas pump and consumers, he said. It played out at the farm level in the form of higher grain prices with a not-so-surprising end result.

“Farmers and the agricultural community have responded to those incentives in those years and got very, very good at what they do and improved their ability to produce, not only in Canada and the U.S., but around the globe, and we’re living in that era now,” Townsend said.


Few see any bright spots that might improve the picture in the short term, or even over the next few years. At best it looks like a long sideways grind, with the possibility of brief interruptions due to weather events — and some potential downside risks that could make the picture even grimmer.

Dan Basse, president of the AgResource Company and another conference organizer, told the gathering the reality is actually far grimmer than many producers outside the U.S. realize.

That’s because farmers around the world have responded to strong price signals, he said. They grew their productivity and met growing demand from biofuels mandates and emerging markets. The biofuel effect is now in the rear-view mirror, and low oil prices suggest there will be little pressure to expand them. Meanwhile, demand growth in emerging markets is softening, Basse said.

“World grain production is now rising faster than demand,” Basse told the meeting. “In the 10-year period between 2005 and 2015, the world added about 174 million acres of grain production. The world is awash in grain.”

At the same time major importers like China appear to be reaching the point that their existing stocks are filled.

“China imported a record of 30 million tonnes of grains in 2014-15, and the Chinese government is looking to slow imports this year,” Basse said. “Their stocks are very high, and the question is whether they’re 90 million tonnes, as the USDA says, or 170 million tonnes as the trade thinks.”

Many analysts suspect China has a full year of corn stocks in storage. Bill Tierney, chief economist with AgResource Company, told the conference in total some estimate China is sitting on grain stocks in excess of 200 million tonnes, and is particularly weighted toward feed grains.

“China has an unsustainable feed grain supply program and I think it will take the market between three and five years to resolve this situation,” Tierney said.

Basse said in the past there’s only been one way these oversupply situations have been addressed — through government intervention to lower production.

“In my country — the U.S. — farmers don’t stop planting unless they’re paid to,” he said.

In no small part that’s due to the design of the U.S. Farm Bill, which offers growers some opportunity to “double dip” and can encourage them to continue producing. At the same time the Conservation Reserve Program, the lone remaining program designed to idle land, remains under budgetary constraints.

“I’m expecting acres to continue to come out of that program,” Basse said.

Either way the first changes that might come will be in the 2019 U.S. Farm Bill, and Basse added he wasn’t hopeful that in a time of government restraint that agriculture would be at the forefront.

Currency effect

Growers in other parts of the world continue to get strong price signals to produce more, said Pedro Dejneka, managing director of AGR Brazil.

In his country, for example, the real has been undergoing a currency meltdown.

“The real has lost 50-55 per cent of its value against the U.S. dollar this year,” Dejneka said. ‘That means Brazilian farmers are earning just as much today, in Brazilian reals, as they were when soybeans were at $17 a bushel.”

In the Russian Black Sea region the ruble has come under similar pressure. Low oil prices and sanctions due to the country’s geopolitical machinations have seen it lose half its value versus the U.S. dollar, similarly masking those price signals to Russian producers.

Canadian and Australian growers find themselves somewhere in the middle. The Canadian currency, for example, has fallen from parity in 2013 to just 75 cents to the U.S. dollar today. Over a similar time period the Aussie dollar has dropped from parity to just US72 cents.

“Their prices have fallen but their falling currency has protected them somewhat,” Basse said.

However, back home in the U.S. Midwest, the impact is inescapable, he added.

Unless some of the currency effect becomes more muted, growers in the areas currently enjoying strong domestic returns aren’t likely to get the message, Dejneka said.

“As long as the real is at $3.50, they’re not going to stop,” he said. “Soybeans can go to $7 or $7.50, and they’ll just keep going. If the currency effect doesn’t cool off, they’ll keep stepping on the gas.”

If that trend continues it could set the stage for a more protracted period of down prices and ultimately more pain for the world’s growers, he said. Likewise, there’s the risk that, closer to home in North America, growers will respond to lower prices by attempting to produce their way out of the crunch yet again, further exacerbating the problem themselves.

Another reality is that Brazilian growers are beginning to see the benefits of better grain transportation infrastructure, including the development of a northern cluster of saltwater ports that are set in the coming years to bring shipping costs down, perhaps even to the point where, like growers in southern Brazil, they’ll enjoy a significant freight advantage over growers in the U.S. Midwest — a dynamic that led Dejneka to make one of the boldest predictions of the conference, something that would have been unthinkable just a few years ago.

“You could see a situation emerge where the U.S. becomes a residual supplier of soybeans to the world market,” he said.

He also noted that Latin American growers typically enjoy margins growers in other areas could only dream of, muting the impact of more expensive inputs like seed, fertilizer and even machinery that’s denominated in U.S. dollars.

“I have corn growers at home who literally have a 100 per cent margin,” Dejneka said. “So if that drops down to ‘only’ 30 per cent, well, that’s still a margin any other producer would love to have.”

Weather watching

It’s likely for the foreseeable future that all eyes will be on the sky as the source for a turnaround.

“It’s an industry that would seem to be on the front lines of climate change,” G3’s Townsend noted. “But so far it seems to be shaking that effect off.”

However, a strong El Nino weather event caused by warmer surface ocean temperatures appears to be brewing, which could cause drier conditions in the coming season in places like North Africa, India and even parts of southern Europe, which may move markets in the coming season.

However, Basse noted, most modern crop varieties are proving to be much more resilient to challenging production conditions than in the past. This year many were expecting seriously impaired canola yields, only to find when the combine hit the field, it was really only a modest hit.

“We’re really beginning to see the benefits of the biotechnology revolution start to appear,” Basse said.

All in all, growers are going to need to be very sharp managers and marketers over the next few years, he added.

“They’re going to need to know their cost of production very well, and know within five or 10 cents what profitable prices are,” Basse said. “They’ll need to watch markets very closely and be ready to move when profitable prices do appear. They may also want to consider that these are opportunities to price crop out several years into the future.”

Gord Gilmour is an associate editor for Country Guide in Winnipeg. Versions of this article first appeared in the Manitoba Co-operator (Nov. 12, 2015, page 33) and Alberta Farmer (Nov. 23, 2015, page 33).

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