Despite the millions of starving people in the world in the autumn of 2007, a looming expansion in use, and successive low-yielding crops, the market was telling us not to grow food.
Longtime readers of my prognostications will note that I predicted the biofuel market would make grain prices more volatile, but not necessarily higher.
While analysts were telling us that we had entered a “new paradigm” in grain markets that would prevent prices from dipping back down to the pre-2008 levels, those of us who had been in the racket for a while knew that what goes up, would invariably have to come back down. Farmers were quick to note that prices in the first quarter of this year were looking a whole lot more like the old paradigm than a new one.
Producers respond to a variety of signals in the market. Agronomic risk, input cost and selling price would be major ones. Despite the millions of starving people in the world in the autumn of 2007, a looming expansion in use, and successive low-yielding crops, the market was telling us not to grow food.
Until the weather scares in the market of the last three weeks, the market was again telling farmers that there was enough grain in the system, and prices were dropping below what most of us would consider break-even prices. The market was telling us not to grow food.
HEADED TO THE FIELD
So why did any of us load up our seeders and head to the field in the face of what could be described as economic folly? Market fluctuations. If what goes up must come down, then the converse is also true. We went to the field prepared to gamble on a market in which prices were destined to increase if the daily supply chain ran into problems. According to the CWB’s latest projected unseeded acres, some of those problems are right here at home.
One of the reasons farmers were prepared to gamble on this year’s market is the increased use by the biofuel industry. With the ability to absorb large volumes of lower grades not well suited for food markets, ethanol and biodiesel have helped to clear lower-priced grains out of the distribution network, leaving more competition among food processors for the higher-quality product.
Without backlogs of low-quality grains, the market is going to be more responsive to demand for food-grade product in the event of supply reductions. It is that market response that farmers are hoping to cash in on when they are purchasing seed in December.
Some people have an ethical problem with using farmland for energy production, but consider the impact the last six months of low prices could have had on seeding intentions if the biofuel market didn’t exist. Without the potential for price improvement, some farmers would have been increasing fallow acres back in April when the market was telling them not to grow food.
Given the current acres that cannot be planted within optimal seeding dates, those fallow acres would have been an unnecessary reduction. One of the reasons we have the amount of seed in the ground today that we do, is the demand for biofuel.
Is food being diverted from starving people because we need fuel? No, food is not getting to starving people because they don’t have money. Whether the price is $4 or $25 a bushel is irrelevant to someone who doesn’t have a dime. Although it is a sad commentary on the ability of the world to feed itself, price has had little impact on the number of starving people on the planet.
When prices spiked in 2008, western governments, including Canada, were increasing budgets for food aid because they knew high prices were going to impact on the world’s poor.
Last year we were busy bailing out some of the biggest corporations on the planet because they had lost their shirts in a bad economy. Did the number of starving people fall because the price of wheat fell? No, the world’s poor were still at risk because our political attention had been diverted from them to banks and auto manufacturers.
The reality of the grain markets for both farmers and processors is that they have become more volatile. The good news for farmers is that lows in the market are likely to be shorter and spikes provide us with more opportunities to capture favourable prices. A market with movement has opportunities, unlike a stagnant market that has few.
The bad news is that inputs tend to reflect those peak prices and are reluctant to return to lower levels when markets collapse. While very few producers were able to sell into the $16 canola market, we all payed for inputs and supplies based on the profitability of that market.
The good news for processors is that there should be less low-quality product in the market. The bad news is that they may have to increase purchased storage to avoid being caught in the next $25 wheat market without product.
Given the shrinking elevator space on the tracks, that may be the real good news for farmers tired of being caught with the risk and cost of storing grain in the hand-to-mouth market to which we’ve become accustomed.
The new paradigm may be more about who stores the grain than it has to do with how high the price is.
Les McEwan farms