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Waiting, worrying season upon those in agricultural sector

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Futures prices for canola have been hit hard, and analysts say the decline isn't over.

RUTH BONNEVILLE / WINNIPEG FREE PRESS Enlarge Image

Futures prices for canola have been hit hard, and analysts say the decline isn't over. Photo Store

Midsummer can be an excruciating time in farming. It's the waiting season, a time when wise farmers take the family to the lake so they don't have to helplessly watch what weather is doing to their crops or listen to what markets are doing to prices.

As good as the crop might be looking now, they are still weeks away from harvest and just a cloudburst way from disaster. Just ask farmers in western Manitoba.

But just as the weather is proving more volatile and unpredictable than ever, the markets are settling down -- literally --after three years of behaviour that fooled many into thinking a "new normal" had been established.

In fact, it was a standing joke that anyone can be a marketing genius when wheat is at $9 a bushel, canola is topping $14, and corn over $8. At prices half of that, where markets now appear to be headed, not so much.

"I don't want to portray it as all doom and gloom," said Mike Jubinville, president and market analyst with ProFarmer Canada. However, making a profit in the coming year is going to require a bit more finesse and a lot more planning.

Canola futures prices have tanked in the past week falling below what is considered "a key support level" of $520 a tonne or $11.79 a bushel. Several market analysts have predicted it will sink even lower in coming months.

Jubinville said the size of the incoming canola crop is less of an influence than some of the macro-factors in play.

The way Jubinville sees it, the past three years have been an anomaly rather than a new norm for global commodity markets, despite all the rhetoric about insatiable demand from a hungry world.

"Markets are inherently cyclical," he said. Rising demand pushes up prices, which draws in more production, which then pushes prices down. But a few things happened in recent years to give that pendulum arrhythmia.

The collapse in equity markets in 2008 pulled speculative money into commodity markets in a way never before seen as investors looked for safe places to invest. That surge caused those markets to swing faster and higher than before.

Demand for key price-setting crops such as corn skyrocketed as ethanol production in the U.S. ramped up. Within a few short years, an industry that once consumed relatively minor amounts of volume grew to where it was competing against traditional food and feed users for one-third of the available production.

Then crop failures cut into the available export supplies from key production regions of the world --such as the former Soviet Union, Europe, South America and finally, the historic drought that seemingly came out of nowhere last year in the U.S.

Corn was so tight in the U.S. last year, there were calls on U.S. politicians to shut down the ethanol industry in the name of feeding people and livestock rather than gas tanks. High feed prices caused the U.S. cattle herd to shrink to its smallest in 60 years. The hog sector also shrank as producers closed barns rather than pay more for feed than their pigs were worth. That demand is gone from the market as those herds rebuild, a process that takes more than a growing season.

Meanwhile, production in the major producing regions appears, at least so far, on the rebound. That means supplies are set to rise more quickly than the demand will recover, with ominous implications for prices.

Plus, now that equity markets appear to be entering a growth period, the speculative funds are withdrawing from agricultural commodity markets. Just as their entry into those markets exaggerated the highs, it is believed their exit will have a similar effect on the lows.

When Jubinville looks at these factors, he's thinking a return to historical price ranges is feasible, barring unforeseen production hiccups in major production regions of the world.

That's not to say profits are impossible, just that hitting the market highs will be harder. Instead of a sustained market rally of recent history, he's predicting the coming year will be characterized by smaller, sharper bursts to the upside.

And it helps of course, if farmers have something to sell, which brings us back to that weather.

 

Laura Rance is editor of the Manitoba Co-operator. She can be reached at 204-792-4382 or by email: laura@fbcpublishing.com.

Republished from the Winnipeg Free Press print edition July 27, 2013 B6

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