WHAT GOES UP
HOW MUCH FURTHER WILL THE MARKETS CONTINUE TO TUMBLE
Over the past several years, high cereal and canola prices have brought growers a good return on their investment. The prices have been better than what growers could have even imagined a decade ago. As a result, net farm incomes have been higher and growers have enjoyed the benefits.
However, as the saying goes, what goes up must come down. On the
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heels of a massive crop in nearly every production region of the world, crop prices have been falling, Lowering revenue for growers.
This is nothing new for producers. Agricultural returns tend to be cyclical—a few years of good returns are followed by a few years of lower returns. This is the inherent nature of agriculture. It is a competitive industry and it has become globally competitive in almost every major crop.
So the big question is, “When will the cycle start to move upwards again?” Certain analysts talk about seven-year cycles, while others favour a different number. There are even cycles within a crop year. Regardless of each grower’s theory on the length of these cycles, the market can only go up when it has hit the bottom.
I think we are at, or very near, the bottom right now. The good news is that prices will go up, but it is unlikely that this will happen on a steep curve. There are more than issues of supply and demand to look at this time around. In the past, the markets saw a mild rally in futures prices. The driver for this is demand from Bangladesh and China, negative weather stories in parts of Ukraine and the United States, and a lower-than-expected stocks report from Statistics Canada. All together, this should have resulted in higher prices for commodities, and more profit for growers.
Unfortunately, the effects of that rally never really reached us in Western Canada. Basis levels generally consumed the futures increase. This kind of market activity could be the trend for a while, because stocks have the potential to linger in Canada while the industry struggles with transportation issues. Even if rail service begins to improve, the backlog in the shipping supply chain will still take months to move. By then, growers will be looking to sell and ship a new crop. Even an increase in demand may not be enough to significantly boost growers’ profits. And this spells a market that may be at the bottom of the cycle for a while.
So what strategy should growers follow in the meantime?
First, having just come from a period of good farm revenues during which marketing decisions were almost error-free, growers must now refocus on profitable prices as opposed to price alone. It may be difficult, but try to leave emotion out of the picture, or you may second-guess your marketing decisions and miss an opportunity to maximize your revenue.
Next, know in detail your cost of production. This will help you make wise marketing decisions when prices rally.
Finally, try incremental marketing. Make a plan to market production in increments throughout the year. How and when you will do this will largely depend on your cash flow needs, but make a plan that works and stick to it.
The downslope of marketing cycles are never fun, nor are they easy from a crop marketing perspective—especially as the good times of recent years are fresh in our memory. But with good planning, growers with a sound strategy can find the most effective path through the lows. Eventually the markets will climb again—growers just have to be patient!
Jeff Jackson is the interim operations manager and markets manager of the Alberta Wheat Commission.