BY JON DRIEDGER
The importanceof crop-specific
dynamics inadrought year
THE 2014/15 GROWING SEASON HAS
been one of the most challenging in recent
years. Each crop year inevitably has pock-
ets that see challenging conditions, but it’s
been a while since we’ve seen widespread
dryness on the level experienced this year.
The hardest marketing decisions in a
drought year are those prior to harvest,
when great prices and selling opportuni-
ties need to be weighed against the risk of
yields not being there to meet obligations.
That said, even when a crop is in the bin,
it’s not easy to know when the timing is
right to make sales.
The single most important thing grow-
ers can do in making marketing decisions
is to fully understand the market struc-
ture and outlook from a global perspective
for each crop they grow. The impact of
an overall decreased Prairie production
will vary considerably by crop. Poor local
yields don’t automatically mean prices will
continue to increase for the rest of the
year. Canada’s relative importance on the
world stage in each crop, and the ability
for end users to find alternate sources or
substitute ingredients, will greatly affect
values going forward.
A good example of this is the market for
durum. Canada is the world’s dominant
exporter of durum, which is why crop
values rose considerably during the sum-
mer when it became clear that our crop
would fall far short of initial expectations.
High prices also have the effect of forcing
end users to source as much as possible
from other countries and to look to either
lower-quality, cheaper stocks or substitute
crops wherever possible. World production
can be expected to increase in the longer
term as farmers respond to high prices.
This will affect prices, both in the shorter
and longer term, in a market that can be
extremely volatile at the best of times.
Canada is just one of many major
exporters of wheat. Our smaller crop has
only a marginal effect on global prices,
given the large overall supply. However,
basis levels appreciated sharply in the
summer. Part of this was the effect of the
Canadian dollar, but an important compo-
nent was also the market doing its job of
allocating our smaller inventories to those
buyers that specifically wanted Canadian
wheat. In other words, outright prices re-
main at the mercy of world fundamentals,
but basis levels help cushion the declines.
Longer-term price direction will primarily
be a function of global dynamics.
For feed barley, it is important to watch
domestic signals, since most of it is con-
sumed at home. However, as a feed grain,
it is also more easily substitutable. Prices
will likely stay relatively firm, given how
short supplies will be all year, but the ceil-
ing is also set by the cost of feed wheat,
dried distillers grains and imported corn.
Conversely, malt barley is more heavily
impacted by quality than yield. Even in a
year of very low barley production, malt
demand consumes less than one-third of
total production.
Crop-specific dynamics will also drive
the prices and outlook for every other
market, including canola, pulses and other
specialty crops.
It should also be noted that markets
are generally quite efficient. A smaller
Prairie crop has been anticipated since
conditions started becoming increasingly
dire in early summer, and users responded
by trying to build some early coverage. It
is not uncommon in supply-short markets
for prices to peak early in the crop year,
and then spend much of the winter and
spring drifting along within a relatively
narrow range. This will vary by crop, but
there will inevitably be buyers caught
short and forced to offer premiums to
get the coverage they need. While a
structural move higher over the coming
months is not impossible, it also shouldn’t
be assumed unless we start to see some
widespread production concerns in other
major growing regions of the world into
the winter and next spring.
Jon Driedger is a senior market analyst
with Farmlink Marketing Solutions.
Outright prices remain at the mercy
of world fundamentals, but basis
levels help cushion the declines.
Fall
2015
grainswest.com
17
MARKET
MONITOR
