RUN AWAY TRAIN
Big Picture Thoughts
Did anyone see this coming? That is perhaps the most asked question this year. I can say with a high degree of confidence that nobody saw this kind of market reaction. Back in October the market was working off traditional metrics, then BOOM! it exploded. But why did the market go nuclear. What factors played into this market to generate this kind of parabolic move, a move not limited to ag commodities. It has infected things like bit-coin, some stocks and real estate prices in certain places. What we are seeing right now is not limited to just ag commodities; however, the Ag world has 3 major influencing factors all converging simultaneously. These three factors are supply, demand and money supply. Without going into a huge exordium about these three let us take a brief look.
First, demand for all ag commodities is extremely huge. Much of this demand is coming from China and that demand would be considered export demand. That means that foreign countries are buying from us. The main question is why are they buying so much? What has changed in the last year and how long will those factors remain in place?
Second, is of course supply. It is no secret that Canada had production problem, and it was hidden quite some time. From my vantage point I believe the overall Canadian crop was only 75% of average. I know it sounds crazy but I have talked to a lot of farmers from all over Alberta and Saskatchewan. It is safe to assume there simply isn’t a normal supply in Canada. Likewise, other countries also have some production issues. Personally, I believe Russia and China both had some sort of “issue”. Their crops seem to be below average when you read between the lines.
There is no bigger elephant in the room then currency supply. For example, since 2008 the US has more than doubled the amount of currency in the system. The ramifications of this fact alone are enormous. In theory, when amount of currency in circulation is doubled, the value it represents is cut in half. Therefore, the price of goods doubles and hence inflation. Extremely simplified version, but you get the point. The worst thing to be in right now is cash as it’s purchasing power is weakening.
This is playing into commodity complex as money flows into different asset classes such as ag. In the most rudimentary explanation the excess flow of money into ag commodities causing the price of these underlying asset to appreciate in value so that the price equals amount of currency in circulations. Ie. There are not vacuums in economics. This elephant in the room is extremely complex and a stampede of Jumanji sized proportions is just waiting to happen. Perhaps, it has just began.
It is only February, and to many it feels like June. Both the trade and farmers have been aggressive. In general, farmers are way more sold than normal. Partly because the crop poorer and partly because of prices.
It is already established that we will run out of canola. Barley will barely be there. Wheat will be lower, but not enough to get all worked up.
As far as prices go, canola is anyone’s guess. It has reached the 750 zone 3 times before and in 1975 it was $1095/mt (24/bu) which in 2020 dollars would equate to 4981.89/mt ($112.96/BU). Which I guess would cause farmers to complain about income tax or something.
Unlike Canola, barley will probably not have the same potential. This is because its a feed and will get kicked out of the ration if it gets too high. Likewise, if the price get much higher than freight becomes a smaller issue and barley can be sourced from other parts of the country or world for that matter. Barley does have a price ceiling.
Wheat is going to get dragged along whether it likes it or not. There is no shortage of wheat in Canada its just that wheat becomes an easy speculating opportunity.
Bottomline for this 2021 crop is that Canada and the rest of the world needs a bumper crop. If there isn’t one prices should remain strong going forward. Remember what was mentioned about money supply and how it causes inflation. Ag commodities could be hitting a new price plateau in the next 24 months. This would be 12 years ahead of schedule, but then again historic commodity super cycles did not have irresponsible governments printing unlimited amounts of currency. On second thought scratch out the irresponsible part; all governments are irresponsible.
2020 crop year is basically done 5 months earlier than expected. Demand will remain strong. Supply is smaller than expected. And there is way more cash hitting the system every day. Prices should remain strong until the crop is in the bin, and it had better be a bin buster.
Remember, that nobody knows when these prices peak out. It could be tomorrow or in 8 months. Don’t get caught up in the past and get all worked up, because nobody saw a run of this magnitude coming. The key is to focus on making a profit and during these times evaluate your risk tolerance. The risk to reward ratio is huge right now. Don’t get side swiped by another 2020.