Trade wars around the globe have created a turbulent marketplace for Canadian farmers — and the wild ride isn’t likely to end any time soon.
“Over the past two years, the markets really stand apart from what I’ve seen in the 30 years that I’ve been following the grain markets,” said Mike Jubinville, senior market analyst with MarketsFarm (a division of Glacier FarmMedia, owner of this paper).
“Weather, of course, is always a market driver, but the influence of politics or political interference into commercial grain-marketing activities worldwide has been a greater issue than I can remember in the years that I’ve been in this business.”
Of course, Jubinville hadn’t seen an American president like Donald Trump before either.
“Trump’s trade policies are like fishing with dynamite — just blow everything up and pick up the pieces at the end,” he said at a recent Alberta Canola Powering Your Profits event.
Even worse, Trump’s disruptive trade tactics are prompting other countries to shift toward protectionist policies.
“The rules of trade internationally are being disrupted,” said Jubinville. “Globalization has stopped, and we’re taking a step backwards now. And this has really ruptured a lot of global supply chains.”
Canadian farmers have seen it affect numerous markets, including India (high tariffs on pulses), Italy (country-of-origin labelling on durum), and China (a near ban on canola seed). But protectionism has a wider effect, he said.
“This rupture in the marketplace has been one that inspires uncertainty in the marketplace. Uncertainty inspires fear, fear inspires selling, and it’s probably kept the pressure on prices beyond anything to do with supply and demand.”
The typical grain cycle sees prices jump up and then plummet before settling into a period of sideways consolidation. Between 2014 and 2018, grain was trading in that sideways range, and Jubinville was hopeful the market was going to swing up again once a “bullish catalyst” arrived.
It didn’t happen.
“Right about this time, Trump’s trade war with China started,” he said. “So we broke out of that sideways range and probably established a new consolidation range at a lower level. This is where we find ourselves today.”
While the global economy is doing well — employment is up and stock markets are reaching record highs — other economic performance measures tell a different story.
“We’re already starting to see some of the canaries in the coal mines giving off signals that economic growth is starting to slow,” he said. “Manufacturing is down. Consumer spending is starting to slow. Debt is on the rise. Trade wars are getting worse. There’s a slowdown in corporate profits… So in terms of a global recession, it’s not a question of ‘if.’ It’s a question of ‘when.’”
Recessions are notoriously tricky to predict, but Jubinville pointed to the aging bull market (now more than a decade old) and the upside-down interest rates on bonds. Long-term rates are normally higher but today they’re not — a situation called an inverted yield curve.
“Whenever interest rates have gone to an inversion even for a short period of time, it has predicted the last seven recessions,” he said, adding, “we’re a year to 18 months away from a recession.”
Demand for Canadian canola seed has been hit hard by the Chinese ban, which could result in crop carry-out increasing to 4.5 million tonnes (up from 3.5 million tonnes).
But demand for vegetable oils continues to grow, Jubinville noted.
“While we’re not selling seed directly to China, it still needs the oil, so we’re back-dooring our way into the Chinese market,” he said.
Domestic demand from crushers is also strong.
“Canola crush margins here in Western Canada have been higher (than now), but they’re certainly still quite profitable,” he said. “I expect the overall crush pace… is going to be record large.”
But with a large carry-over and good yield potential for this year’s crop, there’s not likely to be a shortage, and any price spike will likely be short lived.
“The best chance for canola to start to resume an uptrend is if the bullish vegetable oil scenario reinvigorates itself and continues to move,” he said.
When all is said and done, Jubinville expects the top end of the market to reach around $10.50 a bushel.
“The trading relationship with China has cost us a dollar a bushel,” he said. “If not for that, we would probably be trading $11.50 like we were prior to this whole thing. We’ve knocked a dollar a bushel off this market, and I don’t think we’re getting it back.
“There’s potential to make money on canola, but the margins admittedly are pressured.”
It’s a similar story with wheat, which battled tough growing conditions across the Prairies this year.
“I admit I was reluctant to be a forward contractor of wheat this year,” said Jubinville. “I’m only 20 per cent sold on wheat right now. I’m not comfortable in that position, but it was a matter of waiting to see what kind of wheat we had before I was prepared to make significant commitments on it.”
Prices did rally in September and October, but ultimately, “wheat is not a bullish market,” and the price rise was fleeting.
“This early fall rush has filled the commercial pipeline with all the market-ready wheat that the trade needs for right now,” he said. “So I think we’ll experience a bit of a lull past Christmastime, and we’ll see what opportunities manifest themselves after that.
“From my position today, though, I don’t feel like chasing this thing lower.”
A tough market
Barley, on the other hand, is facing a different, “made-in-Western-Canada problem” — strong production and high prices, particularly on the feed side, but no way to get the grain where it needs to go.
“We have an issue of transportation logistics in trying to get that inventory from the surplus areas to where it’s really needed,” said Jubinville. “Barley has found a sweet spot here from a price perspective. It’s just a matter of can we get it moving in the system.
“There’s only so much we can force through at any one time. That’s giving pricing a bit of momentum.”
The barley market will stay “feistier” than initially expected, and the premium market will be Western Canada.
“I’m 70 per cent sold on barley to date taking advantage of what we’re seeing in the market right now. I’m pretty aggressive on it.”
He’s less convinced about peas, though.
“The issue on peas comes back to geopolitics, with India being the largest producer, consumer, and importer of pulses in the world up until two years ago,” he said.
“Until that policy changes, they’re not going to be a buyer. And if they’re not a buyer, other markets aren’t going to go into any aggressive anticipatory buying. They’ll just pick little bits off here and there as they need it.”
The price has moved a little, but Jubinville doesn’t expect it will climb much higher.
“I still think upwards of $7 a bushel is probably the top end of the market for the moment.”
Alberta producers should watch markets closely and act quickly when short-term rallies occur.
“They’re going to come in the form of one- or two-month spurts,” he said. “It’s going to be a challenging environment this year, and I’m not going to sugar-coat it. It’s a tough market out there.”