Drought: Prairie Farmers Hoping to Recoup Losses

Thursday, October 26, 2023

Growers Watch for Bullish News

By Richard Kamchen

Canadian Prairie growers whose crops were beset by yield-slashing drought are hoping they can at least recoup those losses with stronger returns – but global factors continue to threaten better prices.

Drought has been Prairie farmers' chief impediment this year, with southwestern and west-central Saskatchewan and southern Alberta hit hardest.

As a result, growers are more keenly watching for bullish news like potential supply cuts from competitor countries and stronger buyer demand.

Canola

"The big factor this year is that we likely will not have a monster 8.3 million tonne Australian crop to offset the lower Canada crop," says Ken Ball, senior commodities and futures advisor for PI Financial.

Ball notes the combined canola output of Canada and Australia last year was a record 26.5 million tonnes. But with dry conditions scaling back output in Canada, and Australia's crop returning to a more typical level, total Canadian-Australian production will be down several million tonnes from that all-time high.

"Canola supplies will be tight, and some demand will need to be squeezed out," Ball says.

Jonathan Driedger, vice-president with LeftField Commodity Research, says that while world canola/rapeseed supplies will be tight, Australian carryover is still large, and the EU and Ukraine produced good rapeseed and canola crops, respectively.

As for Canada's canola exports, Alberta Agriculture's Neil Blue anticipates they'll decline this crop year due to Canadian prices being relatively high in the world market.

"Canola prices are expected to be steady to somewhat higher than those of the last crop year," says Alberta's provincial crop market analyst.

Potentially limiting higher canola prices could be reasonably comfortable soybean supplies.

Blue explains that Brazil had a record soybean crop in 2023 and could produce another record crop in 2024, and he anticipates downward pressure on prices during the U.S. soybean harvest.

U.S. soybean acreage in 2023 was below earlier expectations, but production might still be solid. Longtime market analyst and commodity trader Errol Anderson notes that U.S. soybean yields may well end up higher than a year ago after crops responded to improved moisture conditions in August.

Wheat

Despite higher Prairie seeded acres of spring wheat, drought conditions prevented any bin-busting crops this year.

However, Ball points out the world wheat market has changed dramatically over the last 10 to 20 years, with more countries producing sizeable crops. And with more global wheat comes added market competition.

"Russia now out-produces Canada and U.S. – combined," Ball says.

In fact, many expect Russian wheat exports this year will play a big part in offsetting reduced output among other wheat producing countries.

Ball says exporters' stocks look tight and may tighten further, albeit for a short period.

"Things might get tighter by late winter, but then a whole new round of world crops is at hand by the spring," Ball says.

While supplies tighten, unexpected additional demand may arise from India's ban on non-basmati white rice, although Ball says it's hard to say how much added wheat needs the rice ban might create as rice demand may not switch easily to wheat.

Global supplies are even tighter for high quality milling wheat, and Driedger says that could result in widening premiums.

"There may be a larger than usual premium, likely from more of a global pull," he says.

"There is potential this crop year for wheat of higher grade and higher protein levels to command a market premium," adds Blue.

And there are available supplies out there in Western Canada.

"Strong wheat demand resulted in a relatively low carryover wheat supply into the current 2023-2024 crop year. However, a high proportion of that carryover wheat is of high quality due to high quality wheat production in both of the previous years 2021 and 2022," says Blue.

Corn impacts feed

In drought years like this one, hay and forage crops are impacted in both quantity and quality.

However, the dryness has also raised the potential for lower than desirable test weight crops in 2023, causing more of the cereals to fall into the feed category, says Blue.

"Feed demand is expected to continue strong on the Canadian Prairies," he says. "In particular, the reduced production of hay for winter feeding will result in more cattle rations comprised of straw and grain."

Nevertheless, many Alberta livestock feeders, particularly in the south, are using corn instead of barley and feed wheat due to the lower corn cost.

"The U.S. is expected to produce a near-record 2023 corn crop," says Blue. "The logistics of importing corn into Alberta are now well developed and, although many feeders still prefer feeding barley for at least part of the feeding period, corn imports will restrain feed barley and wheat prices during this crop year."

Driedger agrees that it's very likely that the upside price potential of feed quality wheat and barley will be limited by imports of U.S. corn.

"At a minimum, the landed cost of corn acts to put a ceiling on barley and wheat prices," he explains.

And U.S. new crop corn sales to Canada had been running at a record pace this summer.

Also bearish for barley? Export uncertainty in light of China dropping its prohibitive tariff on barley from Australia. Canada's barley dominated the Chinese market during that trade dispute, but now Canadian barley exporters will be forced to find new homes for a large portion of the crop.

Other global factors

Anderson warns about the shadow that strained global financial markets casts over grains, oilseeds, and other commodities.

He anticipates highly probable chances of more U.S. bank failures heading toward the fourth quarter of 2023.

Anderson also recommends producers keep an eye on the severity of China's economic downturn as China consumes over half of all global commodities. And when it comes to commodity markets, it's demand that is king, not supply, he says.

As well, Anderson points out that deflation in China pressures global oil values, which also puts downward pressure on corn ethanol, bio-diesel and canola prices.

Blue concurs that a slowdown in the Chinese economy is a developing issue for markets, but adds it's likely to affect other products more than it will affect grain and oilseed markets, in that people and livestock still need to eat.

"Generally, in the case of an economic slowdown, there is likely to be more of an effect on other consumer goods and services than on food," says Blue. BF