Editor’s Take: Rain and high prices

A now-retired farmer friend says he defines a happy coincidence as when high prices and a big crop happen at the same time.

But he also ruefully admits it would probably just as well be described as a ‘bloody miracle.’ He farmed more than 50 years and, during a recent text exchange, conceded that, “I don’t know if I ever made it.”

As most farmers can relate, there were certainly years of high prices. But those were too often accompanied by drought, early frost or — most recently in his case — hail that took the profit away with it.

Or there were years of high production but terrible prices where it felt more like he was running a food charity than a business.

That search for the elusive sweet spot is on full display in Allan Dawson’s story in our May 13 issue of the Co-operator.

There he explores just what the sky-high canola prices — with spot prices that combine the basis and futures topping $1,000 a tonne — actually mean to farmers.

Other than a few outliers, not much it would seem. In the ongoing dance between supply and demand, the prices have waltzed upwards precisely because there’s little canola in the bin to be lured onto the driveway at the elevator or crusher.

It’s a tight squeeze for the physical user of canola who has contractual obligations to meet for seed, oil and meal, made worse by the actions of market speculators. In a recent report from the Reuters wire service, an ICE canola futures surge was being credited to their actions, as the long positions executed a market squeeze on the shorts, pressuring them to cover and driving the July contract higher.

It’s a situation that’s so dire it’s prompted a ‘coal to Newcastle’ moment in the global canola trade, where an eastern Canadian crusher is reportedly importing 60,000 tonnes of canola from Ukraine in August, just hoping to keep its facility ticking along.

But absent canola to meet this demand, that’s not going to translate into a lot of dollars in the pockets of many Canadian farmers — at least not immediately.

But it does set the stage for some attractive pricing opportunities for the new crop year, albeit not without risk due to current moisture conditions.

As one farmer and long-term market trader told Dawson, there could be a chance to lock in canola prices as high as $15 a bushel.

And the same forces that are fuelling canola prices — mainly high demand from China — are also spilling over into other crops.

The same retired farmer reports growers in his area seeding feed barley, eyeing contracts available at $5 a bushel. In his Parkland region where frost is always a risk, that crop is a reliable producer because of its short growing season.

There remains the production risk to take into account, as always. Much of the province is extremely dry, and at least so far, there’s no rainfall on the horizon. That will naturally make farmers hesitant to price too much of their crop, in the age-old devil’s bargain of trading pricing risk for production risk.

One of Dawson’s sources says he’s lowered his production expectations and he’ll only be pricing about half of that this spring, leaving him with some room to manoeuvre, but still locking in some of these good prices. No doubt there are a lot of other farmers across Western Canada making very similar decisions as they put the crop into the ground.

In a typical market year, the opportunities for new-crop canola peak in the month of June, as the shape of the coming crop begins to come into focus. But this year there exists a chance that markets could find themselves looking at non-existent carry-over, high demand and a drought that’s crippling production.

That’s a true trifecta of factors that could cause the market to shoot higher, and as one market watcher told Dawson, if that happens “all bets are off.”

It’s hard to remember another spring with more tantalizing possibilities and potential pitfalls, and that’s saying a lot for a business of ups and downs like crop production.

In the end, the formula for success is likely to be one of discipline and careful planning, and keeping an eye on the basics.

At least part of that is going to require resisting the base urge to ‘swing for the fences’ and be ready to price for profitability, rather than hanging on, hoping to price at the peak.

As Dawson heard from his farmer/trader, “Do it on a rising market. Don’t do it on a falling market. And do it and hope you’re wrong. Hope that you should’ve sold it higher because you haven’t sold it all.”

There’s no pat answer that fits all farms. Every farmer’s risk tolerance and financial position is unique.

The one certainty all farmers share is that high prices won’t make it rain.

About the author

Editor

Gord Gilmour

Gord Gilmour is Editor of the Manitoba Co-operator.

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