Lately, it’s seemed like one story after another about a record or near-record harvest has passed across my desk.
In November, the USDA upped their estimate of an already-record 2016-17 crop. The agency said soybeans would come in at 4.269 billion bushels and corn at 15.057 billion bushels. Market watchers, already expecting a big crop, weren’t overwhelmed by the news, but it did add a bit more downward pressure to an already challenging market.
USDA had earlier forecast the largest-ever Russian wheat harvest at 72 million tonnes due to favourable weather. At the same time, Ukraine’s grain harvest was targeted at about 63 million tonnes and record exports are forecast. In the European Union, the cereals harvest was a bit below the five-year average, but that wasn’t enough to offset the effect of good harvests elsewhere.
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As the production season has worn on in the Southern Hemisphere, things haven’t gotten much brighter.
In an early-October report, USDA said it was expecting Australia to produce massive crops this growing season as a drought there has broken and soil moisture conditions have improved. They called for a wheat harvest of 27.5 million tonnes (a 12 per cent increase on a year earlier) and a barley crop forecast at 9.9 million tonnes (up 15 per cent). The agency noted only minor challenges early in the growing season with a bit of water logging and an early frost that hit quality in some parts of that country. The report further noted the better conditions will also support greater production of the region’s summer crops, in particular rice, as the year progresses.
Similarly high yields have been predicted for the Latin American agriculture powerhouses of Brazil and Argentina, although there are some concerns a drying trend may be taking hold. The caveat for any numbers from that region are the usual ones about the ability of weather to hamper production between now and their harvest season.
All in all, it’s not a particularly encouraging picture for a grain farmer hoping for better prices and is all the more astounding considering where we were just a few years ago.
In 2008, the talk was of a food crisis as the cost of staple crops like rice and other grains exploded after many years of moribund pricing. At the time market analysts told us a handful of issues were lifting grain prices. Population growth was creating more mouths to feed. Economic growth in developing countries was ramping up consumption, especially as those folks celebrating their improving fortunes by consuming more meat.
What really kicked the market into overdrive, however, was ethanol mandates. The movement was transnational with governments around the world mandating inclusion of biofuels into the gasoline supply in an effort to offset potential energy shortages and climate change. That had the effect of diverting a third of the U.S. corn crop into the energy market almost overnight.
The effect was as one would expect. Grain prices skyrocketed. They also remained stubbornly high on a series of crop failures such as the 2012 U.S. drought. It combined to give farmers everywhere a powerful incentive to invest in more productive capacity.
Despite the old adage of how land is always a good investment ‘because they’re not making any more of it,’ farmers appear to have done just that. In Brazil, millions of new acres came into crop production, for example, and that country saw near-double-digit annual increases in agricultural productivity according to the United Nations Food and Agriculture Organization (FAO) in a report on the future of global agriculture.
The other big story has been the modernization and rapid productivity growth of the Black Sea region. Freed of the shackles of communism and finally given a price signal to make it worth their while, farms in this region have become powerhouse exporters, especially of wheat.
It’s a familiar pattern in commodities, but an unfortunate turn of events for those who embraced ‘it’s different this time’ mentality, assuming the factors driving growth would continue forever.
Some argue that it’s only a matter of time before grain prices improve again. After all, population is still growing, and global economic malaise aside, people continue to claw their way out of poverty. Others worry we could be in for a prolonged period of lower prices as farmers do what they always do — deal with lower prices by producing more bushels.
Right now, with record harvests piling up, it seems the good times are on hold.
Is waiting for crop failure to hit, hopefully somewhere else, or trying to grow their way out of low prices the only options farmers have, or is it time for another strategy?
