Investors lulled by high prices

Ending stocks of corn are likely to begin to drop downwards next year

Chuck Penner

They’re phrases that have gotten a lot of use over the last few months.

Analysts and experts are increasingly describing changes in commodity prices for wheat and corn as a “paradigm shift” or the arrival of a “new price paradigm.”

But Chuck Penner, founder of LeftField Commodity Research said producers should be cognizant that high prices don’t necessarily mean higher profits in the long run.

“High prices often come with higher costs,” said Penner, speaking at the annual Western Wheat Growers convention in Winnipeg.

Producers and others may see a lag time where they can cash in on high prices before costs increase, but eventually margins return where they were before the shift in commodity prices.

“And I think that’s very clearly what’s been the experience for many people in this high-price environment. So it gives you a bit of a lag… but overall it’s not great,” he said.

And while prices are now returning to a sort of equilibrium, Penner pointed out the biggest market changes are still caused by the one factor that is hardest to predict — the weather.

“We had this period of extended highs and they started with 2010 Russian drought, if you remember, markets were coming down in ’09 and ’10, then we had this big drought in Russia and it kept them from falling further,” he said. “Frankly the fundamentals said we should have fallen further. Finally we started to adjust from that… and then we had the 2012 drought in the U.S. and that extended those highs.”

This fairly long stretch of sustained high prices may have distorted both investors’ and producers’ sense of how the market behaves, he said.

“I’m a firm, firm believer in the fact that there are market cycles, and markets go up and markets go down, we’ve kind of been lulled into a false sense of security that that may not necessarily be the case,” said Penner. “We had this kind of high-level plateau, and I think people get carried away by the hype — people in funds, farmers, cab drivers, dentists, people investing in commodities got carried away by this hype that it just could keep going higher forever.”

Those investments themselves then altered the market, although Penner doesn’t believe the impact was as significant as other factors.

Production has tried to respond to increases in price, Penner noted, adding that ending stocks of both corn and wheat have increased of the last two years.

“And frankly the market isn’t so concerned about where ending stocks are at, but whether they are going up or are they going down,” he said. He expects ending stocks for corn will begin to decrease again next year.

“So I’m calling for some gradual gains… not a huge rally,” he said. “I kind of think we’re close to the bottom on corn, so we’ll start to see some relief in sight.”

Whether year-end wheat stocks will begin to fall next year might be harder to pin down, but Penner said that while production has increased, so has consumption. Especially as a smaller barley crop has meant a greater need to use wheat in livestock feed.

“The markets have generally been negative towards wheat, I’m not as much, I’m more of an optimist on wheat,” he said.

About the author


Shannon VanRaes is a journalist and photojournalist at the Manitoba Co-operator. She also writes a weekly urban affairs column for Metro Winnipeg, and has previously reported for the Winnipeg Sun, Outwords Magazine and the Portage Daily Graphic.



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