Strange Times

Greg Petersen
Nov 27, 2019
6 min read

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Executive Summary

Without a doubt the tagline Harvest from Hell is well deserved. In the past 2 months I have gone from combine operator extraordinaire to a very poor substitute farmer psychologist.

First of all, I would like to welcome all my new subscribers. It has been a pretty exciting past few months.

Of course everyone here wants to learn how to be a better grain marketer and grow their farm business, so let's start. As you all know the world is still a mess with regards to the whole world political complex. Nothing is predictable or for that matter, sane. So, the question that we need to ask is how does the Canadian grain farmer market his grain in 2019/2020? A question that needs to be addressed differently this year than in years past. This year it's all about risk management. I don't care what anybody else says, take a step back and evaluate the market for what it is, then couple that with the biggest quality issue Canada and the USA have seen in a long time. This, folks, is not the time for hopium.

World Ag Stage

As quick overview of the factors effecting your agriculture

It's almost December and the market still does not have a good grasp on actual numbers. There are claims that Canada has lost 2.7 million acres of canola which could equate to just over 2 million metric tons lost. However, we really have no idea. It's crazy.

Now, since I have been talking to farmers from High level to the US border, over to Prince Albert, down to Yorkton and back over to Weyburn and many places in between, I would say I have a pretty good grasp of what Western Canadian farmers are dealing with. Basically yields are pretty good; however, quality is way down. The amount of sprouted grain, low protein, and low falling numbers is simply staggering. Of course it goes without saying that just about everything is high moisture.

How do we deal with this? Well, at least we know what we are dealing with. Yields are good, quality is not. This means feed volume goes way up. Quality grain goes way down. It's your old simple supply and demand equation, and the writing is on the wall. It's your job to read it.

According to the Alberta Cattle Feeders Association there are 1.6 Million head of cattle in Alberta's feedlots. This means that demand is limited and unfortunately export opportunities have been thwarted. As any Economics 101 student would tell you that if supply increases and demand stays the same then price must decrease. This is correct in theory; however, so far it's not happening. For some odd reason feed grain has actually increased in price. Feed barley has increased by at least 50 cents a bushel and there is still carry in the market. This is very strange and peculiar because the market knows about the huge amount of poor quality grain and it's still out there. It's just not coming to market. This could be a gift. I personally believe that it is and think the feed market will collapse in 2020, I just don't know when. In conclusion the feed market is out of sync and the current prices are actually pretty high when you consider the last 5 years.

Also, there are some interesting things happening within the elevator system. We are seeing this in specials. It seems that at least once a week some elevator somewhere will offer a premium on some product for immediate movement. This is a very telling tale as they are not doing anything spectacular with their basis, but rather paying a premium for certain products. This tells me, the elevator system is trying to grapple with the quality situation. As it turns out it's not only the farmer that has to deal with this, but also grain buyers who also have commitments on the other side. It's a real tough situation for everybody involved.

How do we market our good quality grain and the border line stuff. This is the time where relationships and transparency matters. Just by knowing what you have and being up front with it, it makes the grain buyers job so much easier. When they have less headaches they always reward those farmers. Trust me. This year will be the year of the Target. Farmers who have reasonable targets in place will get triggered. Of course the 64 million dollar question is at what price? The answer is just a phone call away.

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Crop Evaluation - HRS Wheat

Outside of the feed market the biggest question I'm getting right now is about HRS wheat. How do you market it in this current situation? Of course I have a lot of ideas and strategies, but those are reserved for my Market Max clients. Let's evaluate the current HRS situation in Canada. Right now it's not good. There's no point in arguing it. When HRS is trading at a 35 cents premium to CPS there is something going on and you need ask the question why. For most of my trading life, elevator HRS has traded at premium to CPS by at least $1/bu; closer to $1.50. What's going on? We all know that Minneapolis wheat is trading at 10 year lows at a discount to Chicago wheat. Typically, Minneapolis wheat trades at least 75 cents above Chicago. Right now Minneapolis wheat is trading at a discount of 19 cents. This is almost a full dollar below the average. We can look at charts all day long, but ultimately what does it really mean? Basically, nobody cares about a high quality spring wheat. We see this in the elevator system in Canada via basis levels. As far as I know not a single grain company is doing the heavy lifting to bring the price up via basis levels. This means one thing and one thing only - money. Remember that all grain companies work on margin, so they really don't care about price but rather the spread between the buying and selling. This lack of basis contribution translates to there is no incentive for elevators to narrow in their basis. This is why basis levels are not at all lucrative. Trust me, it's in a grain companies best interest to move product. However, the current basis levels are not bad by any means. They are just not great.

The next thing is why is Minneapolis wheat trading at such a historic discount and lows. Assuming, supply and demand functions actually work it would imply that the supply of hard red spring wheat is huge.

As a farmer in Alberta or Saskatchewan how do you market HRS in 2020? One thing that a farmer can look at is spreads. We all know that these wheat spreads are not trading in a traditional manner and at some point something has got to give. A quick observation of these spreads states that Minneapolis wheat and Chicago wheat should come back into alignment. Nobody knows when this is going to happen, but it could be a good opportunity to gain 50 cents in this market. Wheat is a very strange beast and it can turn on a dime. So does 2020 wheat have potential? Yes. Even though the world is literally swimming in wheat. 2019/20 produced the largest amount of wheat in history at 765 Million metric tonnes, and Canada is expected to produce 33 MMT which is another record. So at the end of the day wheat is not going to be a home run. However, if you play your cards right it is still a profitable crop. The key is to understand what is going on in the background, then market accordingly. When you know this you can make smart decisions that make you money and move your farm ahead so you can farm again next year.

Things We Need To Consider

One thing that we really need to consider this year is the risk of storage. This year the rule of thumb is: if there is any doubt there is no doubt. As in, the risk of spoilage is extremely high and it is not worth the potential gains in the market to store.

Moving Forward

1. Call me and book your feed grains. The potential downside is about 7 times greater than potential upside. ie. The market could rally 10 cents but just as easily drop 70.

2. Get Your Targets in. Make sure you have all your grades and volumes. Pick a target that is reasonable for your grain. Set the target and wait. Reevaluate.

On a side note. if for some odd reason you don't book your grain with me just make sure that you are going to get paid and watch the discounts. - Amongst the roses are lots of thorns.

Call To Action

Now what?

I hope this edition of Market Insights helps. I know it was a little long winded, but your farm is important and we all need to evaluate the current situation as unpleasant it currently is.

Right now, if you're feeling at all overwhelmed by this marketing thing give me a call. I have ways and methods that will help reduce your stress and make you more money.

Thanks again and have a great day. Greg