It’s an exciting time for grain farmers on the Canadian Prairies. Most areas up here have a good crop coming along, while drought conditions across much of the U.S. are causing a dramatic increase in prices.
We like to be cautious noting that the crop is a long way from the bin and that high prices might not last, but it’s shaping up to be a heck of a year, fingers crossed. It’s rare to have both good production prospects and buoyant prices.
Watching grain prices spike is captivating and it’s easy to get caught up in the speculation over how much the American corn crop is going to decline and how high prices are going to climb.
The analysts look for historical comparisons. It’s the worst American drought since X. It’s the biggest decline in corn ratings since Y. Of course, historical price comparisons are easy to make. For corn, soybeans and wheat, we’re heading into record high territory, while canola still has a ways to go to reach the values seen in 2008.
So how high might prices go? When you adjust price levels for inflation, they’re not really very high. This line of reasoning is dangerous though, because it assumes the sky is the limit and that there won’t be ramifications.
For sake of argument, let’s imagine wheat prices for Canadian growers going to $15 a bushel with canola at $25. Those able to harvest a decent crop this fall would have their best year ever. While appealing on the surface, that scenario leads to all sorts of unfortunate consequences.
The price spike back in 2008 caused food riots and was a contributing factor to political upheaval in many countries. Watch for more unrest if prices continue to rise.
Closer to home, high feed prices hurt the bottom line for cattle and hog producers. Some media commentators assume that high corn prices mean higher prices for pork and beef, but it doesn’t really work that way, at least not in the short run. There’s no way for the red meat industry to pass along price increases. Instead, the extra cost comes out of their bottom line.
It’s in the best long term interest of grain producers to have a healthy and profitable livestock sector.
About 40 per cent of the American corn crop goes into ethanol production. The rapidly rising price of corn is creating great political pressure on the U.S. renewable fuel mandate. If that policy were to be altered, it could have a damaging effect on demand in the years ahead.
What happens to farm input costs when grain prices spike? Remember what happened with fertilizer prices back in ’08. And what do you think land prices and cash rents will do if the grain market becomes unhinged?
With the mainstream media now doing stories about the drought in the American corn crop and all the Twitter about it, you have to wonder how much of the price increase will be fueled by speculation rather than supply and demand fundamentals.
As a grain producer, it’s natural to dream about $15 wheat and $25 canola. If you’re planning to sell or rent the farm and cash in on the bonanza, high grain prices are naturally on your wish list. The higher the better.
Those who plan to remain in the industry might want to take a different view. It would be better if prices moved to higher plateaus gradually to minimize the marketplace disruption.