GrainsWest Winter 2017

By JON DRIEDGER

Marketdynamics

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, under-

standing the dynamics that drive values,

keeping an eye on profit margins, man-

aging risk and leaning toward crops that

have growing demand will help farmers

make the best decisions in an environ-

ment full of unknowns.

Profits may not be the sole reason most

farmers do what they do, but it is the ox-

ygen 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 previ-

ous 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 soy-

beans. To a somewhat lesser extent, corn

can also shape the outlook for Prairie mar-

kets. 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 mar-

kets 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 understand-

ing 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 con-

sumption from both human use (particu-

larly 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 sup-

plies more quickly than what might have

been anticipated. Wheat is somewhere in

between. Global growth in human con-

sumption is more incremental, but live-

stock 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 in-

formed marketing decisions, especially be-

fore 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 grow-

ing 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.

Jon Driedger is a senior market analyst

with FarmLink Marketing Solutions.

Long-termtrends canshape short-termplans

Winter

2017

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