A KNOWING GLANCE AT 2019
BY JONATHAN DRIEDGER
“… because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; this is to say we know there are some things we do not know. But there are also unknown unknowns; the ones we don’t know we don’t know.”—Donald Rumsfeld, former United States secretary of defence.
Forecasting grain markets six to 18 months ahead is a daunting task. One might be inclined to say, “why bother with a market outlook?” But, while acknowledging that no one has a crystal ball, a well-considered forecast is a critical step in developing a farm marketing plan. A detailed marketing plan is the foundation from which disciplined selling and risk management decisions are made, providing the guard rails that guide us through turbulent market moves.
For this reason, we consider what the 2019/20 season might look like for wheat, thinking about the “known knowns” and the “known unknowns,” while also being respectful of the lurking “unknown unknowns.”
Next season sets up reasonably well for wheat. Global stocks are projected to be near-record large, just shy of 270 MMT. This number is deceiving as it includes a disproportionate amount held by China that is unavailable to world markets. From a market perspective, what matters is available supplies in key exporting nations.
Stocks in major exporting nations will be drawn down significantly by the time the next Northern Hemisphere harvest rolls, given smaller 2018/19 crops in Russia, the EU and Australia. This has triggered a strong draw from all exporting countries, including Canada. Global wheat values should be firm through winter and into spring as a result, which should offer support for new crop prices. However, strong prices should trigger a supply response from farmers, which threatens the longer-term outlook.
Initial estimates point to U.S. winter wheat acres declining by roughly one million, to the lowest level in a century. However, spring wheat acres will be up, and will increase on the Canadian Prairies, as well. Early projections are that winterkill won’t be a major problem in the United States, the EU and the Former Soviet Union, though this could change. Australia is likely to have a rebound in production as well after a major drought through 2017 and 2018. In short, the crop across the major exporting countries is expected to rebound to levels seen two and three years ago.
Global wheat demand typically doesn’t change much year to year, leaving little opportunity for a surge in disappearance to provide an unexpected shot in the arm.
The biggest known unknown, of course, is weather. This risk can go either way, but the fact that wheat is grown across so many countries reduces the risk of a supply crunch. Even in a year like the current one, where crops were lower across several key countries, prices haven’t been explosive. The fact that stocks are drawn down will make the market a little more sensitive to weather, but a setback across several regions is necessary to create a bullish situation.
Unknown unknowns are, by definition, events that are completely unexpected. Plenty of things could influence wheat prices beyond the “normal” factors such as weather, exports and other fundamentals, either directly or indirectly. Government policy is going through a period that is even more unpredictable than normal, with a decidedly less trade-friendly leaning. The Canadian dollar has been relatively weak compared to the American dollar, directly affecting our competiveness in export markets. But the situation won’t continue indefinitely. The wider global macroeconomic situation seems increasingly fragile as growth slows while the world is carrying record levels of debt. The list of what-ifs is endless.
All of this creates a backdrop that should make one cautious about potential downside price risk for wheat in 2019/20, barring a year of widespread yield setbacks. Even within a season of price headwinds, markets will inevitably have periods of bullishness. Until the facts tell us otherwise, these should be viewed as opportunities for farmers to lock in some prices and manage their risk.
Jonathan Driedger is a senior market analyst with FarmLink Marketing Solutions.