THE RECENT TARIFF wars between the U.S. and China may have taken the wind out of grain markets, but over the sweep of the last decade, a whole host of factors have had an influence.
Speculators, the value of the Canadian dollar, advancing communications and technology and the rise of ethanol production have all had a role to play in the way markets have behaved, according to three analysts.
“Ten years ago, demand from speculators was driving up grain futures not necessarily because of the value of the investment, but because they were looking to add to their portfolio of financial options,” says Jeff Robinson, grain merchandiser at Woodrill Farms. As a result, he says prices went way higher than they should have.
At about the same time, in 2010 – 2011, the Canadian dollar was valued at or above par with the U.S. dollar and doing things ‘that we hadn’t seen in decades’, according to Todd Austin, the Grain Farmers of Ontario’s marketing manager.
THE ETHANOL FACTOR
Ethanol production was in high gear, and government incentives had bumped up demand for corn in both Canada and the U.S.
In Ontario, the McGuinty government was injecting $520 million over 12 years into developing the sector and, in 2007, put a five per cent ethanol mandate for gasoline that was increased to 10 per cent in 2017.
While part of the idea was to reduce greenhouse gas emissions, the move also viscerally affected grain production in the province.
“It changed the grain economy,” says Phil Shaw, a grain farmer, long-time commodity market commentator and agricultural economist. “Now, about 33 to 35 per cent of Ontario corn goes into ethanol production, where before, very little went into industrial use.”
He notes that the move increased cash prices and the industry is still benefiting from those decisions and actions today.
WEATHER EFFECTS AND DOMESTIC CHANGES
Shaw says that drought in the U.S. Midwest in 2012 combined with the increased demand from the ethanol industry spiked corn futures prices to as much as $8.49. Predictably, a glut in the market ensued, causing prices to fall off in 2013-14.
“As they say, nothing cures high prices like high prices,” Austin says.
He notes that two big changes in the grain industry affected the domestic landscape: the end of the Canadian Wheat Board, which opened markets out west and the expansion of shipping ports — especially in Hamilton, which went from one to three terminals in that amount of time.
“It’s really turned into a nice hub for agricultural products — with Richardson’s, Parrish & Heimbecker and G3,” he says.
The recent trade wars — especially between the U.S. and China — have definitely had a dampening effect on prices, according to all three experts.
“I’m answering the phone call from the producer looking to sell grain as well as from the person looking to buy that grain and trade it on the world market,” Robinson says, adding that demand over the past five years seemed almost limitless.
“Prior to the trade wars, there was a healthy demand for almost all of Ontario’s volume.” Now, he’s noticing a real contraction of that demand.
“Since July 2018 (when U.S. President Trump imposed stiff tariffs on Chinese goods), the rug’s been pulled out on agricultural demand for corn and soybeans,” says Shaw. “Soybean prices dropped $2.50 in about a month, and we’ve never recovered from that.” Corn prices have also been affected by an erosion of the demand for ethanol due to changes in U.S. domestic policy.
Add into the mix the fact that, while China represented about two-thirds of the global demand for soybeans in the past, the outbreak of African swine fever will slow demand for soybeans destined for hog feed, according to Austin.
“If China is going to import soybeans, it’s more likely going to come from South America than North America,” Austin says, adding that South American production is now bigger than that of the U.S., and presents a real challenge for Canadian grain in terms of competition.
ON THE UP SIDE
“We’ve had our issues in the last two years, and they’ve all been geopolitical,” says Shaw, but points out that current conditions have softened the blow somewhat.
He says that the lower value of the Canadian dollar since it was at par in 2012 has helped as a stimulus for Ontario cash prices and helped weather the downtrend in commodity futures prices. Low interest rates and increases in productivity have also provided some relief.
“Simply put, there’s been a big increase in yields due to newer crop genetics — exponentially so in corn,” Shaw says. Where 200 bushel per acre yields were unusual 10 years ago, they’re more normal now, which has increased supplies.
Austin agrees, adding that more sophisticated production techniques like using crop scouts, agronomists, and technologies like automation and GPS have gone a long way to increasing yields.
INFORMATION AND TECHNOLOGY ADVANCES
Austin also points out that, through social media and the internet, there are more sources of information that are more readily available than ever before, and producers are taking advantage of it.
“There are better opportunities to make marketing decisions than in the past,” he says. “You no longer have to call a broker and can do it yourself.”
He cites 24/7 access, overnight trades and using tools like resting orders in which producers can electronically trigger an automatic sale once the price hits a certain level.
NOT THAT BAD
While the past decade has seen its share of ups and downs, Robinson says it’s nothing compared to the disasters of the past.
“When I talk to producers about bad years, they have to go all the way back to 1992,” he says.
Looking to the future, Robinson cautions about reading too much into news of fresh disasters elsewhere.
“We have more information available now, but you have to make sure it’s not just confirming your own personal bias about where you think the markets are going to go,” he says, and advises looking at a number of different sources to develop solid marketing plans. •