Drought conditions across Western Canada and elsewhere have driven wheat yields down — and wheat prices up.
“I’m having trouble remembering any time in history where we have seen prices for fall delivery ahead of harvest this high,” said Mike Jubinville, senior market analyst with MarketsFarm. “It’s not the all-time record high for wheat prices that we’ve ever seen, but for a crop that’s not harvested yet, that’s about as high a price as I can recall.”
Prices in Alberta for fall deliveries of No. 1 hard red spring are anywhere between $10.50 to $11 a bushel, Jubinville said on Aug. 6. In some areas, wheat producers have seen price jumps of 20 to 30 per cent over the previous month — an increase of between 50 and 65 per cent year over year — as a result of the expected drop in yields.
And those prices could climb even higher.
“Given the production constraints that we’ll have on our own western Canadian agricultural sector, I don’t think this is over yet in terms of how high these prices could potentially go,” said Jubinville.
But predicting how much “is like throwing a dart at a board at this stage of the game,” he added.
“Last year in terms of all Canadian wheat production, we had about 35.2 million tonnes. This year, I think we’re going to be around 22 million tonnes. We’re talking about a 13-million-tonne hit here.”
Southern Alberta producers have been hit hardest by the drought.
“That area has been exceptionally dry this year,” said Geoff Backman, manager of business development for Alberta Wheat and Barley. “Some of them are reporting somewhere between 40 to 60 per cent of what they would normally expect.”
Canada exported about 26 million tonnes of wheat (including durum) in the last crop year and doing half of that would be a stretch, Jubinville added.
“I don’t think we’re going to have enough to do a 13-million-tonne program this year,” he said. “It doesn’t matter what the price is — we can’t sell it if we don’t have it.”
But Canada isn’t alone as hot, dry conditions have hit both U.S. and Russian wheat production and heavy rains in some European wheat-producing countries have driven down quality.
“Three of the major six wheat importers in the world are starting to show some evidence of issues. Supplies in North America for milling-quality bread wheats are going to be short this year,” said Jubinville.
Usually, hard red spring wheat and durum prices start dropping at the end of October (as South American crops are harvested) and rally in mid-January to early February.
Market analyst Brennan Turner expects that pattern to hold.
“Once we start to see what the Southern Hemisphere harvests are looking like, I think we’ll see a little bit of a pullback,” he said.
In the meantime, producers can also expect to see some “pretty attractive” premiums, predicted Jubinville.
“I feel like there’s going to be a game of whack-a-mole that’s going to be developing as you see one company after another that needs wheat at a certain location at a certain time but can’t get it,” he said.
“They’re going to have to offer some premiums in order to wrestle that product out of the farmers’ hands. So these kinds of premiums are going to be popping up and disappearing in some fairly rapid fashion.”
Growers need cash flow at harvest but if they can be “patient,” it should pay off, he said.
“At the end of the day, you don’t want to just give your wheat away, especially when prices are at these levels,” he said.
When it comes to marketing, the standard advice hasn’t changed, and may even be more important.
The first step is knowing the quality of the wheat in the bin.
“That’s the foundation for your grain-marketing plan,” said Turner. “Even though you might not have the biggest yields this year, knowing the quality of your wheat is probably going to be more important than ever in terms of protein discounts and other quality characteristics.
“Knowing that quality is going to be really important.”
The amount is equally important, added Backman.
“This is the sort of year where a farmer can get a lot of confidence to move on any opportunities if at harvest they’re keeping a really good handle on how much grain they have available to sell,” he said. “That confidence is all going to come from any extra effort at harvest to track the volumes that are going into the bins and to keep track of the total commitments already made.”
Producers will also want to stay in regular conversation with their trade partners, said Turner. “Really leverage the relationships you’ve built over the years, whether it be with the individual grain merchandisers that you work with or even your accountant and banker.”
That’s especially important for producers who want to trade their crop on the futures market, said Backman, adding grain brokers can help growers use the futures market and options contracts.
“Brokers I’ve talked to over the course of this year have said that this is the most volatile year that they’ve seen in over 25 years,” he said. “As this has already been a year of substantial price volatility, a broker could be useful to provide farmers additional ways to manage that risk and help them navigate that.”
Producers can also work directly with their grain companies to negotiate a contract that “mimics” the futures and options markets instead of a standard delivery contract, Backman added.
“The benefit of these contracts is that they do expose the producer to some of that market volatility, which could be an additional option if a producer thinks that there is some potential positive movement in pricing,” he said.
“So if a producer is looking to take part in market volatility, they can ask an elevator for information on these contracts as an alternative to a standard delivery contract.”
Cash flow is king
And finally, producers will need to be cognizant of their cash flow as they consider any pricing opportunities that pop up.
“This is obviously a year where it’s not going to be all about volume sales, but more strategic sales,” said Turner. “Just being mindful of the different opportunities relative to your cash flow requirements is a really healthy plan to have.”
By taking this “disciplined, focused approach” to their marketing program this year, many wheat producers in the province should be able to mitigate the effects of lower yields somewhat, he said.
“It’s a frustrating year for a lot of people, and in the grand scheme of things, the weather functions are factors outside of our control,” said Turner. “So you just have to focus on the things you can control — things like getting your wheat tested, touching base with your merchandisers regularly, and knowing when your bills are due.
“Those are probably the three most important things you can control today, and that’s what you need to focus on. Everything else is noise.”
For more content related to drought management visit The Dry Times, where you can find a collection of stories from our family of publications as well as links to external resources to support your decisions through these difficult times.