Climbing costs, market price uncertainty adds risk

It’s standing room only at the market outlook sessions during the winter farm meeting season, as analysts throw a confusing array of graphs and charts onto the screen and peer into their crystal balls.

It’s often great entertainment with lots of colourful commentary and humour, so it’s worth the price of admission on that basis alone.

However, virtually no one walks away from these sessions any wiser about what the crops they are about to grow will be worth by the time they are harvested and ready to sell.

Analysts liberally sprinkle their commentary with qualifiers, such as “it depends on the weather,” or “what Putin does next.” So we wind up with comments such as these from past coverage of a major U.S. commodity conference: “Odds are very good that there’s going to be a supply side scare at some point in the marketing year,” as one analyst told his audience.

Or another who said, “basically it’s 50-50 as to whether yields are going to be better than average or worse than average.”

Both statements are about as useful today as they were three or four years ago.

Don’t get me wrong. There is useful information in these sessions, particularly about what is happening in other major producing regions and the so-called “market fundamentals,” which capture the amount of grain and oilseeds left in the supply chain, where it’s positioned and how vulnerable key buyers feel.

Prairie grain farmers depend on exports for most of their income, so that global context is important.

That said, “how long is a piece of string?” might be the best way to answer the question of what prices, production costs and the weather will do over the next 12 months.

Supply chain disruptions last year saw a spike in fertilizer prices and unprecedented shortages of herbicides. No one saw those coming. This was particularly problematic on the weed control front because varieties of canola, soybeans and corn that farmers grow these days are linked to using specific herbicides.

During the drought of 2021, market prices soared and yields plummeted. That meant farmers who had forward-sold their crop, which then withered in the drought, had to buy grain at an inflated market price to fill contracts signed when prices were much lower. That really burned.

For the most part, farmers got through those unexpected shocks. But it could just as easily have gone the other way.

At least that’s the conclusion of the Canadian Agricultural Policy Institute research team led by agricultural economist Al Mussell after it took a deep dive into how producer margins were affected by surging volatility that started in 2021 and spilled over into 2022. Researchers were mainly interested in what implications this holds for policy-makers and the risk-management programs they design for farmers.

They looked at the spread between surging production costs for fertilizer, seed and fuel and market prices for farmers growing wheat and canola in Alberta and for farmers growing corn and soybeans in Ontario.

They found that in 2022, the market rallies more than compensated for the increase in production costs, but they cautioned that won’t always be the case. More importantly, the scenario had a compounding effect on risk.

Farmers had to absorb the higher production costs upfront. “Surely this stretched many producers’ credit line and caused significant financial stress and worry,” the CAPI report says.

“The view that emerges is that the strong crop producer returns in 2022 actually involved dodging several bullets, and that if the future will involve the kind of volatility spawned by scarce energy, fears of food insecurity and geo-political instability, we need to be better prepared with agricultural policy.”

Sometimes farmers refer to themselves as gamblers who throw millions of dollars into the ground every year and hope it all turns out.

But that’s selling themselves short. Ultimately, success in farming is about their ability to take calculated risks and manage through the unexpected. That’s not rolling the dice. That takes skill and courage.

Either way, the stakes are higher than they’ve ever been before.

» Laura Rance is vice-president of content for Glacier FarmMedia. She can be reached at lrance@farmmedia.com.