Justified arguments

The second week of trade in the grain markets was highlighted by the release of the U.S.D.A.’s World Agricultural Supply and Demand

The second week of trade in the grain markets was highlighted by the release of the U.S.D.A.’s World Agricultural Supply and Demand Estimates on Monday, Feb. 10. For a report that isn’t historically known to create buzz in the markets, this W.A.S.D.E. showed significantly lower ending stocks for both wheat and corn, pushing those markets up. Specifically U.S. corn carryout for the 2013/14 marketing year came in at 1.481 billion bushels, well down from January’s forecast of 1.631 billion bushels and the pre-report expectations of 1.619 billion bushels. The bullish downgrade was mostly the result of U.S. corn exports being increased 150 million bushels. As for wheat, ending stocks were lowered by 50 million bushels (45 million bushels more than the trade was expecting) due to increased exports for a forecasted 2013/14 carryout of 558 million bushels. As the old adage goes, the cure for low prices is, well, low prices. However, corn is still having a tough time breaking over the $4.50 per bushel level (almost 1.5 billion bushels is still a lot!). In all reality, until the seeders are put way in late spring 2014, it’s hard to justify an aggressive bullish approach.

Oats futures have been playing the volatile card recently as the logistical issues hitting Western Canada is limiting movement of supply through the pipeline to U.S. millers. The fundamentals behind the recent price increases on the Chicago Board of Trade are sound: about 45 per cent of the U.S. supply is imported from Canada and with less railroad movement, this would intuitively drive up the price. Further, the 21 per cent stocks-to-use ratio expected this year in America is fairly tight compared to the average, providing another catalyst to push price up. One has to remember though that this is the price for delivery into only a few locations in Illinois, Minnesota, and Wisconsin. With that in mind, potentially driving your oats directly to these points could get you a price similar to the futures price, but here in Western Canada, where ample supplies exist, it’s hard to expect it.

On that note, lately we’ve been hearing more arguments that the Canadian Wheat Board’s single-desk deregulation is the catalyst that triggered this entire logistical quagmire we’re seeing here in the Prairies. Undoubtedly, the C.W.B. held a significant position as to efficient railcar distribution and movement. Without them, the argument is that there’s no order. This is false. In any new open market, there is a period of adjustment. Last year, everyone got nine or ten dollar wheat and we were happy but when the price drops, it’s time to point fingers. There’s a myriad of factors that hit the markets this year (i.e. huge crops everywhere for one).The reality is, this new free market is in its infancy. You can’t call a newborn baby disrespectful because they cry a lot – from an economics perspective, correlation does not imply causation. Remember how Steven Stamkos was called a flop his rookie year in Tampa Bay under Barry Melrose? Look where he’s at now.

Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, Mr. Turner spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and now mobile grain marketplace (app available for iOS and Android). His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email (b.turner@farmlead.com) or phone (1-855-332-7653).

— FarmLead Breakfast Brief