Markets are an assembly of moving parts and, in this environment, inflation is a major component.
If you can get the inflation versus deflation trade right, it will go a long way toward understanding how all markets could move.
The commodity and consumer price inflation of the past few years started in 2020, with COVID-19 inducing food hoarding. That was followed by the 2021 drought across the Prairies.
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Then there were the impacts of war, and its associated trade sanctions, in a major food, energy, fertilizer and mining region.
It would take one or two events with similar impact to push prices back up, since commodity prices have been drifting lower since last summer.
The broad-based Bloomberg Commodity Index, which encompasses energy prices from diesel to natural gas, food from grain and meat to sugar, as well as metal industrial prices, has been in a downtrend since last spring.
Energy costs that underlie almost all economic and social activity are changing as crude oil, diesel and gasoline prices continue to drop. As of this writing, oil was trading around US$65 per barrel.
Could that drop to $60 or $50? Of course it could. As always, never say never when it comes to the markets.
Turning to grains, over the past half century we’ve had about a dozen significant grain price spikes. In every case, with one exception during the 2008 commodity super-cycle, prices fell back to where they started.
While there has been a series of positive announcements from agriculture and the energy industry, recent global policy in energy, food, trade and environment suggests the momentum for crop prices is going the other way.
For example, at one point there were seven new renewable diesel facilities in Canada under construction or proposed over the next five years. That would have increased potential canola crush demand by 50 per cent, or almost six million tonnes.
Grain food processors have also announced canola crush expansions or new facilities across the Prairies. I’ve read that crush production capacity is growing even faster in the U.S.
At the same time, one of those Canadian companies has now shelved its renewable fuel project. It’s unclear if more will follow.
In Germany, government is considering a phase out of biofuels produced from food or animal feed crops by 2030. The EU has already announced it will ban soy and palm oil use in biofuel production this year due to food security and deforestation concerns.
Likewise, the soybean sector was disappointed by a recent U.S. Environmental Protection Agency renewable fuel proposal, which put proposed soybean crush projects into question.
As a result, the relative value of soybean oil compared to soybeans, as well as soybean crush profit margins, dropped.
U.S. law changes state that Canadian biodiesel producers who once received a blending credit for selling fuel into the U.S. will no longer be eligible for the new producer’s credit. That will only be available for American-based production, including heavily subsidized U.S. biodiesel and renewable diesel exported into Canada.
With all this going on, keep in mind that cheaper crude oil prices could change the economics and enthusiasm for all those renewable fuel alternatives.
The growth of grain processing and food manufacturing will continue, but there will always be supply and demand bumps along the way. And, as we’ve seen in the past, the cure for high prices is high prices, and downtrends can last for a long time.
When canola and other grain prices are high, you don’t want to bank on those numbers staying up there forever.
With canola futures falling below the important C$800 per tonne level and Minneapolis wheat futures breaking below the important US$9 per bushel support level, attention needs to be paid.
Bottom line, I hope I’m wrong, but history doesn’t paint a pretty picture of what grain prices could look like going forward. For producers, the risk is always lower prices.
We won’t know the trajectory markets will take, so take advantage of flexible grain option hedging strategies. They can help capture farm revenue opportunities, manage downside risk and sleep better at night.
