MID WINTER WRAP
- Greg Petersen
- Jan 28, 2020
- 6 min read
World Stage:
The coronavirus in China is causing immense fear and panic. As of Friday, Jan 24, China had quarantined 35 million people. Apparently, this virus is a new strain which causes uncertainty. Nobody really knows where it came from or how it works or how deadly is.
· South America has started to harvest their soybean crop, which will be the largest ever produced.
· India’s wheat output could hit 108-110 million metric tonnes in the 2019-20, an increase of 5.68-7.64 per cent over last year’s 102.19 mt. (China is #1@ 134 MMT)
Financial World:
· The Canadian Dollar is hovering around .758555
· The S&P index is at all time highs. As of today it is at 3280
· Oil is trading at $53/barrel (light crude)
Political World:
· USA- Impeachment trial of the President, Donald Trump.
· Britain is still actively working on Brexit. Boris Johnson signs withdrawal agreement (Jan24).
· China is actively quarantining their people.
Risk To Reward Management:
Because of the world political situation, farmers must focus on risk reduction. Over the past few months, prices have been very good. One cannot expect the market to rally into a new price zone without some sort of catalyst such as a crop failure. In fact, the market will probably take a breather until US planting season begins in March.
Markets aside, every single producer needs to make sure their grain is stable and will store. I know I sound like a broken record, but the days of speculation are over. If there is any doubt, there is no doubt that grain needs to be sold ASAP!
Moving Forward:
The number one thing you can do right now is know what is going to get seeded next year. Then decide on how much new crop grain you are comfortable booking. Remember, the new crop prices right now are very strong. These prices produce positive margins.
Feature Commodity
Canola
Supply / Demand:
The most important number to look at is ending stocks. This can basically be translated into how much grain is left over at the end of the year. In 2020, it is expected the production will be down and likewise ending stocks. Examining the year to year world production the 2020 crop is 93% of 2019. Likewise, examining ending stocks in the same manner the result is 78%. This means that ending stocks are smaller in terms of production. Typically, this scenario is considered bullish. However, it’s only bullish when examining canola as an island which it is not. As everyone knows there are a million things affecting the markets at any given time. Therefore, we need to look for opportunities and grab them.
World:
World Produced 72.4 MMT of canola in 2019, in 2020 expected 67.7 MMT.
World: Ending Stock 8.5 MMT of canola in 2019, in 2020 expected 6.8 MMT.
Canada:
Canada Produced 20.343 MMT of canola in 2019, in 2020 expected 19 MMT.
Canada: Ending Stock 4.1 MMT of canola in 2019, in 2020 expected 3.74 MMT.
Market Zoning and Timing:
In the past 12 months canola has ranged from 439.4 to 481 which is bang on the natural trading range for canola. In fact, the average 12 month price is 459.22 with a standard deviation of 9.61. This explains why for 68.2% of the time canola futures traded between 449.71 and 468.93. This also tells us that when the market is trading in the 475 range that statistically sales should be made as the market is in the upper range.
Now that the market has dropped back down in the 460 range one has to consider the fact that the market may take a breather.
Risk To Reward Management:
As of right now there are some big hurdles that need to happen in the next 4 months. One of course, is Canola out in the field. Quite frankly, nobody has a clue whether this canola will be any good. This fact can change everything.
Also, there is this little matter of trade. It so important it could literally swing the market a buck on either side. It’s completely unpredictable.
With that all being said there is a lot of risk out there right now, but there is also the potential for a large reward. When you examine the overall canola complex there is potential for a rally during the 2020 growing season. Right, now we need to cross a few bridges before any Texas hedging.
Smart Contracting:
Once again, targets are by far the best way to market. Just set and go. In today’s marketplace anything above 470 on the futures is a wise level.
Current Trend and Looking Ahead:
In the short term it looks and feels like canola will be bouncing around these current levels. In the longer term it looks as if canola will rally back up to that 480, but it will need some trigger to push it much above that.
Moving Forward:
Make sure your canola is stable. If it’s not, it will heat.
If you don’t know what to do, then call me.
Charts and Graphs
Business Development
So, my friend James Benkie, the Dean of Olds College, challenged me the other day regarding farm financial ratios. He got me thinking. How many farmers understand farm financial ratios and benchmarks? My bet is not very many. This is a very important topic and it seems that nobody is taking the time to educate farmers. I earned a diploma in agriculture, a degree in agricultural economics and I was never taught these numbers. I have learned them because I’m interested, not because I was educated.
Over the next year, I’m going to make it a commitment to educate farmers through Market Insights about farm financial ratio. My goal is help farmers understand what is going on so that they can make wise financial decisions that make sense and are profitable. Stop with the latest gizmo, grab a cup of coffee and lets figure this out together.
The paper that James gave was called Farm Financial Ratios and Benchmarks, Calculations & Implications This paper was developed by Dr. David Kohl, an agricultural economist from Virginia Tech University.
Frist Ratio:
Current Ratio: Total Current Farm Assets / Total Current Farm Liabilities
Strong >1.5; Stable 1.00-1.5; Weak <1.00
Current assets are the assets that can be converted to cash immediately. These are things like grain, cattle, cash, insurance money, etc. These are the things you could use right away to pay your operating loan. It would not include things like land, buildings or tractors, etc,
When the ratio is above one that means that the immediate loans like operating loans and other payments can easily be covered. If the number is less then one it means you can’t make you payments.
This ratio is important because if you can’t make your immediate payments, well that’s not good sigh.
Below is taken from the website Investopedia.com
What Is the Current Ratio?
The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.
KEY TAKEAWAYS
The current ratio compares all of a company’s current assets to its current liabilities. These are usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less.
The current ratio is sometimes referred to as the “working capital” ratio and helps investors understand more about a company’s ability to cover its short-term debt with its current assets.
Weaknesses of the current ratio include the difficulty of comparing the measure across industry groups, overgeneralization of the specific asset and liability balances, and the lack of trending information.
Formula and Calculation for Current Ratio
Call to action
one thing can you do this week:
The number one thing you can do this week is make sure your grain is stable. If it is not stable, then you need to sell it right now. Also, there are a lot of bags out in the country and all those are going to hit the market in the next 40 days or so. This could create downward pressure in the local market – especially the feed market.
Things coming down the pipes:
In the next 60 days we should start seeing some excitement with seeding intentions down in the States. Here at home there will be a spring harvest, and nobody know quality or quantity. Other than that, there should be some excellent opportunities to make some profitable sales for the remainder of the 2019 crop and 2020 which is just around the corner.
Thanks,
Greg Petersen
Insight Ag Marketing ltd.
Any questions or comments please give a shout.
403-782-5488
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