First, the bad news. Farmers around the world did a great job last year. The good news? Farmers around the world did a great job last year.
Such is the unfortunate reality of the grain market. As speakers at last week’s Cereals North America conference in Winnipeg said, the world is “awash with grain,” which has driven prices into the doldrums. Unless there’s some “good” news (perversely, as in someone else having a poor crop), it seems there is little chance of a turnaround any time soon.
It’s been a long time since we heard as much bearish news as we did at last week’s conference. The two words “set aside” even surfaced, a reference to the 1950s to 1980s U.S. policy of paying farmers not to grow crops in order to reduce supplies and increase the price. That was combined with holding government-owned stocks in reserve, and not releasing them until they reached a target level.
Those policies worked, but in the 1980s the U.S. government said it was tired of being the only one holding up prices, and accused competitors of taking advantage of them with all-out production. That led to the Export Enhancement Program, which gave government-held stocks to exporters as a bonus for making sales, and eventually to the “Freedom to Farm” policy in 1995. That meant that farmers were free to grow as much as they liked, and subsidy programs would be based on revenue, not production.
The U.S. government further juiced production with biofuel subsidies, and more than 40 per cent of the corn crop is not used for ethanol. That was in the “We’re going to run out of oil and be held hostage to the Saudis” days. Today we’re in the “U.S. is almost self-sufficient in oil” days. Now gasoline is cheaper than ethanol, and U.S. overall fuel consumption has dropped, so ethanol demand has stalled.
The subsequent strength of the U.S. economy combined with other world troubles has meant that the greenback has soared compared to other currencies. On one hand that’s been good news for Canadian producers — the weaker loonie has partly offset prices relative to the U.S. The bad news is that other currencies have dropped much further. If you’re a Brazilian soybean producer, it’s party time. In Brazilian reals, soybean producers are receiving as much as they did in 2012 when the price was US$17 per bushel. So there’s even more incentive for them to continue all-out production.
The same applies to the Black Sea countries, that combined are now the world’s largest exporters of wheat. The weakness in the Russian ruble and Ukrainian hryvnia means they’re also partly isolated from lower U.S.-denominated prices, allowing them to be even more competitive. The U.S. and Canada combined are now at a record-low 26 per cent of the world wheat market.
If you’re looking for hope on the demand side, it might be awhile. In his presentation, Dan Basse of AgResources noted that not only has biofuels demand plateaued, so has the sharp rise in per capita calorie consumption in Asia. He forecast that world per capita consumption will only increase modestly, partly because an aging population doesn’t eat as much, especially meat. As for the ever-increasing world population that we hear so much about needing to feed, Basse noted that it’s actually expected to drop in Russia, Europe and Japan, which have been among the larger per capita consumers until now.
China has recently been a major driver of import demand, but a recurring theme at last week’s conference was just how large China’s corn stockpile has become. This is a government-held reserve that must be released for sale when the stocks are three years old. The USDA puts the stockpile 90 million tonnes but trade estimates range as high as 200 million. Either way, China’s feed grain imports are likely to slow dramatically.
If you’re rather uncharitably hoping that a crop shortfall (somewhere else, of course) will turn things around, you may have to wait awhile. El Niño has been getting plenty of headlines recently, but weather specialists at the conference were mixed on whether it would have much effect, except possibly in the Black Sea region. There was more consensus that a switch to a La Niña phase later this year might cause more crop problems.
But with so much production now spread into newer regions such as the Black Sea and South America, total world production is now more stable, and made even more so by the increasingly widespread adoption of modern farming practices. Just as in the past, sooner or later there will be another production blip and another bull market. But the evidence is that the blip will be smaller and the bull market will be shorter.
Farmers have been responding for all those calls to feed the world. Once again, they’re not being rewarded for their effort.