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60 days of Uncertainty

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January 2021_ 90 days of uncertainty
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Market Thoughts

My prediction for the next 60 days is that the market will continue to drift, yet the violent volatility that we have will most likely persist. This is because for the next 60 days the market will be in limbo as the world transitions from the mentality of old crop to new crop. For Canadian farmers, the next 60 days will be particularly unpredictable as 2021 was a drought. This La nina event is expected to continue until mid spring of 2022, meaning that the market will be on edge until it gets some solid new crop information.

Why This Matters

This matters because if the drought premium is removed the market could easily drop 30% in a very short time period. Without a doubt nobody wants to even think about a repeat of 2021.

How do you deal with this reality?

The best thing to do in this situation is to figure out two things before it’s too late. One, what is the maximum amount of grain you are willing to pre price in 2022. For most farmers this amount is going to be vastly different then last year. However, it is important to evaluate the real risk of crop failure. Perhaps, this year is only 10% of estimated production or maybe it’s zero.

The second thing that needs to be evaluated is the new crop market today vs new crop market in November 2022. Try to stay away from comparing today’s prices, as they are drought premium values. Because if the new crop market price today does not have enough profit margin, then the answer is simple. No sales because the risk is too great.

There are two steps to figure this out. One: Is this price good? Two: What is the projected profit margin? If the profit margin is higher than your risk tolerance, then make a sale.

The only thing left to do is to figure out what is good profit margin and how much of the crop you are going to presell.

Remember there is nothing wrong with standing aside and waiting when the deal doesn’t feel right.

Quick Chart

Last edition we looked at the spread between Minneapolis wheat and Kansas.

This time lets evaluate the chart of Canola Crush Margins. The margin is still negative, yet it seems to have stabilized. This is a warning sign of what will happen the minute new crop canola is available. You can expect basis levels to widen out dramatically if we have an average crop in 2022.

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