LONG-TERM TRENDS CAN SHAPE SHORT-TERM PLANS
BY JON DRIEDGER
Marketing decisions are difficult at the best of times, particularly prior to planting given the uncertainty and potential scenarios that could play out over the ensuing year. However, understanding the dynamics that drive values, keeping an eye on profit margins, managing risk and leaning toward crops that have growing demand will help farmers make the best decisions in an environment full of unknowns.
Profits may not be the sole reason most farmers do what they do, but it is the oxygen that sustains the business over time. A key part of potential profitability is the outlook for prices. Markets are difficult to predict with certainty, particularly for a crop that is still months away from even being planted, and that will be marketed over an 18-month window or even longer.
The winter months are typically a time when major news hits somewhat of a lull. The Northern Hemisphere provides the majority of the world’s grain production, and this winter period is when the previous year’s crop has been fully accounted for and priced into markets, yet attention hasn’t been fully turned toward the next cycle. South American production is an important driver, particularly for soybeans. To a somewhat lesser extent, corn can also shape the outlook for Prairie markets. Otherwise, the supply side of many balance sheets is in a “wait-and-see” mode.
We are also coming off a year when the world experienced record production for most major crops, including wheat, oilseeds and coarse grains. The Prairies struggled with quality in many areas, but overall production was also high. The result is that there are very few markets that are set up to be particularly tight going into the 2017 growing season, even if in a number of cases stocks won’t be burdensome either.
Planting decisions are typically shaped by price outlook, something that is often uncertain in mid-winter, but there are a few things that growers can do to try to tilt the market in their favour.
First, focus on opportunities to lock in profitability, particularly in crops that have the headwind of a heavy supply going into the growing season. Even heavy markets see periodic recoveries as end users look to cover their needs at low valuations, potentially opening up price opportunities for farmers. Many special crop markets can also offer new crop contracts at profitable levels. Growers need to have an accurate assessment of their production costs so they can know with confidence whether or not an opportunity is actually profitable for their farm. Producers also need to be managing risk and locking in profits without leaving money on the table if there is the potential for greater upside. This requires a sound understanding of the dynamics that will drive prices through the coming year, and monitoring them on an ongoing basis for any changes.
Second, growers will want to lean toward those markets that have more favourable underlying demand stories. In these cases, there is a better chance for excess supplies to get worked through more quickly, and for end users to be more eager to step in and get coverage.
Vegetable oil has seen stronger demand growth in recent years due to rising consumption from both human use (particularly in emerging markets) and biodiesel. This provides a tailwind for crops such as canola. Pulses continue to see growth as well, although the surge in production this past season could leave some additional stocks to work through.
Crops like oats and feed grains see little or no structural demand growth, and there is a high degree of substitutability between the feed grains. That’s not to say that producers should ignore these crops—demand may not be growing as rapidly as it is for other crops, but it is also steady. That being said, there is a lower chance of seeing demand draw down supplies more quickly than what might have been anticipated. Wheat is somewhere in between. Global growth in human consumption is more incremental, but livestock feeding could help to work through the excess supply, and there remains good demand for high-quality Canadian wheat.
In closing, it’s important to make informed marketing decisions, especially before planting. Ensuring you have a proper understanding of all the factors that will affect your profit is key to success. From market outlooks to profit margins to growing demands, spending time on research and news (or having a market adviser who you trust to put in the time) will ensure you make informed decisions that you can feel confident about. You’ll sleep better knowing every move you made was one with intention.