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Hang on, market turbulence ahead

FarmTech: Currency wars, actual wars, China, ocean freight, Russia, and oil are 
just a few of the things roiling grain markets these days

A Chinese ship being loaded with Brazilian soybeans last year captures three big factors affecting grain markets — China’s buying power, rock-bottom freight rates, and a hugely devaluated Brazilian currency. But that’s just the start of a long list.
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Tough times are here to stay. This was the message that Errol Anderson delivered to a silent, sombre room during a session at FarmTech.

Errol Anderson predicts that the tough economic times will last for several years at least.
Errol Anderson predicts that the tough economic times will last for several years at least. photo: Alexis Kienlen

“There is no sense kidding ourselves about what is going on,” said Anderson, a market analyst and president of ProMarket Communications. “What we’re going through right now is a correction. There’s no doubt about it.”

It was the same message from John DePutter, who also drew standing-room-only crowds of producers looking for some tips for the coming year.

“We’re operating in a tougher period here,” said the president of DePutter Publishing, who has been analyzing markets for more than three decades.

“Now what we’ve got is cheap prices curing cheap prices, but it’s going to take awhile to do that.”

Anderson, a FarmTech regular, described a world where all sorts of conflicts are playing out and roiling markets.

Ocean freight rates are at all-time lows, commodity prices have plunged, and the red-hot American dollar — coupled with the collapse of currencies such as the Russian ruble and the Brazilian real — is skewing prices around the world.

“Everybody is buying the U.S. dollar,” said Anderson. “Everybody wants to be the lowest currency in the world, except for the Americans. They want to increase their rates.”

But that’s just the start of Anderson’s list.

He fingers Russian exports for keeping wheat prices down and war in Syria for creating global economic uncertainty.

Then there’s China, burdened by debt and no longer buying commodities like there’s no tomorrow.

“China consumes half of the global commodities, which will affect everyone, and the U.S. economy is already slowing over what is happening in China,” said Anderson.

It all adds up to a mountain of uncertainty, and it’s going to continue for a while, he said, using oil as an example.

“We can go up to 40 or 50 bucks (a barrel), but we probably won’t go higher than that. Could we go back to $25? Sure, why not? That’s the pattern that I am sensing in the next three years.”

His forecast is that oil will settle out somewhere in the “the high 30s.”

Or maybe not.

“To go higher, it would take geopolitical tensions, something in Syria, and we could have quite a rally. If that occurs, the Canadian dollar is on its way up. At the same time, the U.S. economy shifts into crude oil and into precious metals, we’ve got a reversal coming. It’s something we should see in the next few weeks.”

What’s ahead

DePutter touched on many of the same points, but said if producers want to know what the future holds, they need only look to the past.

The London, Ont. market watcher walked his audience through a series of price graphs for a host of commodities from grains to oil. All showed near-identical peaks and valleys, with a big surge following the 2008 financial crisis.

“We’ve seen the (once-in-) 30-year explosion, the highs, and now we’re into the levelling-off process and within this process there will be bull markets, but not like the one from 2008 to 2012,” said DePutter. “We need to look at these graphs once or twice a year and remind ourselves of the cyclicality of agriculture, remind ourselves that there are these great swings that some of us see once or twice in a career. And three times if we are fortunate enough to have an extra-long career.”

So the plan for the coming year, and the next few ones, should be to watch for price jumps and sell some production before the little spikes disappear, he said.

But also take advantage of what DePutter calls “the great Canadian dollar bonus program.”

The loonie’s fall — it was well above par in 2011 — has shielded Canadian farmers from the pain suffered by their American counterparts, he said. But even if the dollar stays near current levels, part of that advantage is largely gone, he added.

“The great Canadian dollar bonus program is on its last legs,” he said. “You won’t get the same bonus you’ve got for the last four years. The last few years you’ve been, in general, buying your inputs (prior to seeding) with a stronger Canadian dollar than you’ve been selling your crops (after harvest).”

DePutter likes the prospects for canola and yellow peas, although when it comes to red lentils, he urged his audience to remember that the “higher they rise, the harder they fall.”

Grains outlook

For Anderson, corn is king in the grain world, and should be monitored if you want to know where markets are heading.

“Three fifty a bushel is the Rock of Gibraltar on corn,” he said. “If it breaks $3.50, we’re heading to $3.20. I’m not convinced this will happen because commodity funds are out of fire power and they can’t short corn anymore because there’s nothing left.

“I’m low-grade bullish on corn.”

Barley prices will bounce and move up to $2.15 or $2.20. But there won’t be a shortage of barley because of Black Sea exports.

“Just like corn, we’re seeing stability and a bit of upward movement, but without weather it will be stalled,” said Anderson, who also isn’t expecting big changes in wheat prices.

Yellow peas are a good-news story because India is short due to drought.

“Book it, book it,” Anderson implored his audience. “Don’t say that is not enough and I can’t make money on $10.50 peas.”

As soon as India backs off, peas will fall by $3 a bushel, he predicted.

He also expects canola crush and exports to set records this year — although China (because of debt) and the U.S. are wild cards.

“If outside markets interfere, the canola markets could go sideways. So far, the low Canadian dollar has saved profits, but other things in the market still need to be corrected.”

But the watchword for all farmers is caution.

DePutter’s advice is to “bulletproof the operation and get it ready for some tougher times ahead.”

That means becoming more efficient, he said.

“Gone are the times when it pays to go out and buy stuff — whether that be land, bins, machinery or whatever — because it will be worth more the next day or next year. Any capital purchase has to bring results, has to improve efficiency, not because you think they’re going to go up in value tomorrow.”

About the author



Alexis Kienlen lives in Edmonton and has been writing for Alberta Farmer since 2008. Originally from Saskatoon, Alexis is also the author of two collections of poetry, a biography, and a novel called "Mad Cow."



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