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Wheat rally stalls at just the wrong time

Prices are off summer highs but a drop in global production sets the stage for another rally this winter

For much of this year’s hot, dry summer, Alberta wheat growers could look forward to higher prices to offset lower production.

But now they can’t even count on that — at least not for the foreseeable future.

“We have seen prices pulling back a little bit over the last few weeks,” FarmLink’s senior market analyst Jonathon Driedger said in an Aug. 22 interview.

“Now that we’re starting to get into some harvest in Western Canada, we’re seeing that the crop isn’t as big as it could have been, but it’s also maybe not as bad as it could have been either.”

Production estimates out of Europe, Russia, and Australia are lower than normal because of dry conditions in those countries, too — but the situation isn’t quite as dire as first thought, said Driedger.

“We had a combination of things that caused the market to sit up and say, ‘It looks like we’re losing production out there.’ And prices responded accordingly,” he said.

“But it’s pretty common to see the markets overreact in the heat of the moment, and the concerns that drove the prices up are easing a little bit.”

Canada’s wheat crop is expected to be lower than last year. In its Aug. 31 crop report, StatsCan forecasts all-wheat production will be just under 29 million tonnes — one million tonnes less than last year and more than three million below 2016’s total. (For Alberta, total wheat production is forecast to be 9.59 million tonnes versus 9.98 million in 2017 and 10.11 million two years ago.)

“People think that prices should go higher with a smaller crop in Western Canada. Not necessarily,” said Driedger. “Canada is important in the global market — but not that important. From an overall production standpoint, we’re not very large.

“So from a global perspective, if our crop is a bit smaller than people thought it would be, that definitely takes some away from the exportable supply, but it’s only part of the global market.”

The saving grace — and the thing that might push prices up for Canadian producers — is that all the major wheat exporters are in the same boat.

With drought severely limiting new crop in key wheat-producing regions such as the European Union, Australia, Russia, and Kazakhstan, North American suppliers should have no shortage of opportunities.

“We have a bit of a smaller crop — but more importantly, we have a smaller crop at the same time that Russia and Australia have a smaller crop,” said Driedger. “That’s where we think the Canadian wheat prices could get a little bit of help as we look a little further into the year.”

Export behaviours will also play a factor, he added. Early in the season, Russia and Ukraine are typically aggressive exporters that sell their wheat cheaply.

“We’re seeing some of that now, and that’s part of what’s causing a short-term decline in prices. That’s totally normal,” he said.

“But it seems that they’re likely to run out of their exportable wheat a little sooner than they had in the past because they have a smaller crop.”

Marlene Boersch, managing partner at Mercantile Consulting Venture, agrees.

“We are really lined up for increased exports out of North America because it will be the next wheat in line that is the cheapest,” she said. “If the pace continues at the rate it is going right now in terms of exports out of Russia, they should be sold out by some time in December. This is, I think, when the doors open specifically to the North American grains.”

Additionally, Australia and Argentina produce their wheat in the ‘off-cycle,’ so they fill the window when most other wheat-producing countries don’t have crops. That’s where the smaller crop in Australia will be an important piece of the puzzle, said Driedger.

“As these pieces come together, we think we’ll see more exports coming out of the U.S. and Canada,” said Driedger, adding prices should pick back up in the second half of winter as demand increases.

“The importance of the U.S. and Canadian wheat exports grows as some of these dynamics play out. It’s not an overnight thing, but from a big-picture perspective, that’s where we see Canada having an important role.”

While the outlook for wheat prices is “relatively positive,” producers will need to balance the potential for stronger prices with risk within their own businesses.

While producers don’t want to be too aggressively sold in order to take advantage of higher prices later in the year, they also need to pay their bills, so should be making some sales as prices rally or local opportunities to make sales pop up.

“The best outlook today could get derailed tomorrow by uncertaint

y. And we have more uncertainty now than we would in a quote-unquote normal year,” said Driedger.

“It’s all part of the balance with managing risk while taking advantage of opportunities.”

— With files from Commodity News Service Canada

About the author

Reporter

Jennifer Blair is a Red Deer-based reporter with a post-secondary education in professional writing and nearly 10 years of experience in corporate communications, policy development, and journalism. She's spent half of her career telling stories about an industry she loves for an audience she admires--the farmers who work every day to build a better agriculture industry in Alberta.

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