If you are looking for a marketing opportunity in the commodities business, the key factor to be searching for is a situation when a market is out of balance. Efficient, effective markets strike an equilibrium between demand and price which ensures an orderly flow of that product from its point of origination to its end use. Markets which are out of balance are usually quick to recover, so if farmers are looking for an opportunity to cash in on a market situation, they should be focusing on finding the places where a market is out of balance and then seizing that opportunity before the equilibrium is restored. Right now, the soft wheat market is one such area where a market is out of balance and ripe for growers positioned to make spot sales at inordinate premiums.
From a purely supply and demand perspective, the available supply of 2014 crop wheat has been known for several months. Since harvest wrapped up this past fall, the market has been entirely aware of how much wheat existed and the relative quality of those stocks as well. North America is not particularly short on soft wheat supplies; with slightly over 22% stocks to use ratios, there is no fundamental risk of running out. Winter is not traditionally a big season to export North American soft wheat with the Great Lakes St. Lawrence Seaway closed to navigation due to ice, and wheat is already at a significant premium to other feed grains, so our domestic wheat supply, while already large, has little risk of being pulled down by either a dramatic rise in exports or a significant increase in feed usage. So what has been propelling wheat values to the recent highs? And how long might we expect this to last?
The soft wheat market in Ontario has been the fortunate recipient of four significant market forces that have driven prices upward. The first of these is the wet fall and delayed soybean harvest which have without a doubt cut into 2015’s production area. With less wheat planted, and likely some of the existing acres sown into dubious conditions, growers are reluctant to sell wheat – even old crop wheat which is safely stored away in the bin. The lack of willing sellers forces the price higher in order to loosen supplies. The second factor which has driven Ontario wheat values higher is the recent decline in the Canadian dollar. Since commodities essentially all trade in an underlying U.S. value, the weakening of the Canadian dollar has amplified the upward movement in U.S. wheat prices, and made those substantial price moves look even bigger in our currency. The third factor chasing wheat prices higher is fund money looking for a greater trading opportunity than exists in the energy futures markets that have twisted into a downturn. Oil prices plummeting and the rather optimist scenario in the CBOT wheat futures has attracted a lot of money from the struggling energy bracket. Finally, the fourth factor is the growing uncertainty in the Russian economy which has led to rapid inflation and its government’s decision to limit wheat exports as a means of keeping food affordable in the midst of inflationary pressure.
The interesting piece for domestic wheat producers is that three of the four factors driving wheat prices higher in recent weeks are the result of the oil market’s reversing fortunes. The Canadian dollar goes up and down as oil prices go up and down. The Russian economy is heavily dependent on oil, and the recent collapse in energy prices is the factor which triggered the Russian economic catastrophe, and if investments in oil and gas were more certain of a return, there would be less money flowing into wheat futures. In the bluntest of terms, with the exception of this past fall’s inhospitable weather, the key factors driving this winter’s wheat market all pertain to oil prices.
There is no question that the energy market has pushed the wheat market out of balance; the questions which wheat producer need to deal with are: How long can this last? And how far can we go without a correction?
Personally, I am suspicious that the correction has already begun, and we’re already seeing wheat prices move back into balance with supply. A Canadian dollar at US $0.85 is actually right in line with our 14-year average exchange rate. Recent shifts in the value of our dollar may in fact have been the return to “normal.” Energy money won’t stay in ag commodities for long. Our volumes are simply too low, and at some point in the very near future, they will be looking to buy back into energies in order to capture the low. Markets strive to stay in balance, and the price movements are the adjustments between what was known, and the news of the moment. The wheat market borrowed its news from oil, and will begin to shift back towards the situation which it had held a few months ago.