Confessions of a Grain Market Analyst - Part 2
Long-Range Forecasts are Worthless

No matter how smart the person is who does them, grain market forecasts beyond a year out (and even that’s stretching it) aren’t worth the digital ink they’re written with. Sure, they satisfy the accountant’s need to insert a line item in the projected budget but have no purpose beyond that. Most long-term forecasts are glorified trend analysis and real life markets don’t behave that way. Weather is the main driver of grain markets and we all know how accurate those forecasts are. Throw in a few unpredictable changes to economic or trade policy and you end up with a complete fog. True, one of these forecasts occasionally ends up being right but that’s a clear case of more luck than brains. But hey, if you’re looking for a long-term outlook, we’d be happy to provide one. We’ll get the dart board all warmed up.
Confessions of a Grain Market Analyst - Part 1

I am not a prophet.

When it comes to predicting the future for lentil or oat markets, I don’t get answers from on high. I chose the company name “LeftField” for a reason. In agriculture maybe more than any other business, things come out of left field. This year’s durum market was a good example. A lot of acres were planted in spring. We saw that coming. The wet summer started to provide hints that fusarium would be a problem. We didn’t predict that but began building that possibility into the outlook. But the heavy snow that hit the crop in November came out of left field. That was the last straw for the market. We could see some of these things coming, but not others. Rather than a prophet, maybe "tea leaf reader" is a better description.

The More Things Change...
It would be amusing if it wasn't so annoying (and predictable). It seems many economists and analysts have forgotten a key lesson from Economics 101 - markets are cyclical. They act surprised that grain and oilseed markets can actually slide to levels seen only a few years ago, and may actually have a little more to go yet. Same thing applies to crude oil markets. What did they think would happen when farmers responded to the high price environment and the weather mostly cooperated? Hmm. But now that prices have dropped, they only see disaster and can't imagine there's another side to the cycle. Low prices will discourage production, encourage consumption and markets will eventually work their way higher. Unless the weather gets ugly, consumption usually takes a while to chew through stockpiles but eventually, it happens. It always does. Yes, even crude oil prices and the Canadian dollar will work their way higher. And when they do, these same analysts will claim we're in a new price paradigm (yet again).
Truth in Advertising?
I'm really tired of the A&W ads (among others) deceiving consumers and making conventional agriculture look like it's producing unhealthy food. And my kids are getting tired of my fruitless rants at the TV. In contrast, it was refreshing to see our local butcher shop handing out leaflets that show the miniscule estrogen content in beef compared to many other common foods. They're using honesty, a novel marketing tactic. But let's face it; they can't match the marketing budget of the major fast food chain that uses trickery (a more common marketing tactic) to manipulate consumers, and throws farmers under the bus. Maybe I should "inject" some honesty by dropping off some of those leaflets at my neighbourhood A&W. But that would mean stepping inside, something I've resolved never to do again.
Rail Rant

It may be heresy to say so, but I’m not a fan of last year’s federal government action on rail service. Putting a spotlight on the problem probably helped kickstart grain shipping, but the cynic in me thinks the legislation’s timing in April actually had more to do with increasing rail movement. The problem with almost any government action is there are unintended negative consequences. Take for example the legislation to limit cell phone contracts to two years. Sounded good but the phone companies simply charged more for phones and the net impact was zero. The rail legislation pushed more cars to Vancouver and Thunder Bay but left other parts of the industry seriously under-served. Just ask shippers of oats and flax to the US or producer car loaders how badly the ham-handed legislation hurt their business. One thing needed is an independent clearinghouse of all rail orders and car availability. Yes I realize that requires more government legislation, but it would improve on last year’s whack-a-mole approach that started the unproductive spitting match between grain handlers and grain movers that helps no one.

If GMO Opponents Win
I'm starting to fear the GMO opponents are winning the day. As more and more food manufacturers in the US and elsewhere pander to the forces of "marketing" and take advantage of consumer ignorance, the momentum against GMOs is growing. This is despite the complete lack of scientific proof of harm from GMOs. The latest move is Russia's consideration of a ban on GMO production in the entire country. Unfortunately the activists seize on these type of announcements as "proof" of problems with the GMOs and the vicious cycle of misinformation continues to build. So what will happen if this trend continues? Conventional agriculture will be booted to the sidelines and become a niche in itself. For consumers, this would mean a 40% increase in pesticides used on crops, lower yields and more videos of famine in various parts of the world. I hope the activists are okay with this outcome because it's the logical end of their irrational and ideological opposition to GMOs.
Farmer Myths
I've heard a couple of things the last few days that made me downright cranky. The first was a report on CBC radio that said farmers were a dying breed with 75% ready to retire. It was all doom and gloom. I guess the documentary writer hasn't been out to a farmer meeting in that last five years. I've noticed a huge change in the average age in the room, with far more younger people. That's a reason for optimism.

The other line I just heard recently I've come across many times; farmers are just "price takers". Using this victim mentality is a bit of an insult to the many successful farmers out there. And it's simply not true. Farmers have the ability to select prices over a long timeframe and use risk management tools to improve price performance. They're not victims of the market, they're participants. And besides, which business is able to set prices independently of the market? None. Even Apple has to take market realities into account when it prices its products. The farmers I know are smart enough that the "price taker" label simply doesn't apply.

End rant
Food Activists Misguided

Is it just me or do others also get really annoyed at food activists that would like to force farmers to abandon technological advances and return to a “simpler” time when all a farmer had was a hoe, a pitchfork and a straw hat? Why is it that new technology is automatically assumed to be bad or that manmade chemicals are worse than naturally occurring ones? Full disclosure: I don’t receive a penny from Monsanto. Would these activists be willing to give up “factory communication” devices like cell phones and the internet and only use old technology like the telegram or two cans and a string? Why should farmers be relegated to the 19th century while the rest of the world moves ahead, using the latest technology? Feeding the increasing population will require even more advances, not less. So far, technology has reduced the volume of pesticides used, the amount of land required to produce crops and losses due to insect damage. And it has the potential to increase yields even more through water use efficiency and disease resistance. That’s what people in food deficit countries need. Until these naïve activists come up with a better alternative, I wish they would just stop with their incessant demands. Required reading: Peak Farmland and the Prospect for Farmland Sparing.

New Small Grains Market Information
Recognizing the monumental shift in the Canadian grain marketplace and the resulting information gap, LeftField now offers a new Small Grains Letter covering wheat, durum, barley and oats. This weekly Small Grains Letter provides brief market developments and comprehensive market indications, including futures and cash prices, basis, spreads, global price tracking, S&Ds and statistical reference material. For more information, check out our services page.
10-Year Projections - Really?
At the risk of denigrating my profession, I really wonder about the value of Ag Canada releasing 10-year income projections for agriculture. I realize a bunch of assumptions and disclaimers go into these forecasts, but c'mon, really? Apart from annoying farmers and allowing bureaucrats to fill in blanks in their budgets, these forecasts are essentially worthless. First of all, no one can accurately predict the future (The Black Swan is recommended reading) of macroeconomic events, although some might guess right occasionally. Secondly, most agricultural markets are affected by this little thing called "weather" which is also highly unpredictable despite our best attempts. Finally, the forecasts ignore the basic rule that agricultural markets follow cycles -- high prices encourage higher production which causes low prices followed by lower production and higher prices, over and over again ad infinitum. So predicting an extended period of high prices simply ignores Economics 101. At best, market projections have about a six-month shelf life and even that's stretching it. Those who admit we can't predict the future tend to make the best risk managers.
Too Much Hype?
If you look behind all the hype about shrinking food supplies and commodity inflation, you'll probably noticed that it's mostly coming from a group of people with a very vested interest in making the markets go higher. That's right, news stories (and we use that description loosely) with headlines like "Get ready to be swamped by food inflation", are based on the sales pitches of commodity fund managers whose only interest is driving prices higher. In one sense, these are self-fulfilling prophecies; if you scream "food shortage" loud enough, someone will buy what you're selling. They conveniently forget that markets are cyclical -- high prices will encourage production and discourage consumption. That's Economics 101. We're not saying that commodities are plentiful right now. It's just a caution that when you see reports proclaiming new eras or new paradigms, consider the source.
Signs of Life

While traveling to various meetings across the prairies, I have been pleasantly surprised by the number of younger farmers in the crowds. After years of seeing mostly grey heads at farmer meetings, the share of twenty and thirty-somethings at every location was large enough to be striking. This is a great sign of the optimism in the industry and will help dispel some of the traditional doom and gloom that the media tends to focus on.

Marketing Support for Special Crops

The 2010 Canadian Special Crops Marketing Manual will help buyers and sellers answer questions such as:

  • How do current prices rank against historical values?
  • When is usually the best time of the year to market crops?
  • How often are prices at various levels?
  • What are the relationships between various crops?
  • How are prices in international markets behaving?
  • What factors are influencing the Canadian marketplace?

Click here to see a description of the Canadian Special Crops Manual. The Marketing Manual will be shipped in late 2010, but a discount is available for early orders.

The New Paradigm

I came across an article the other day that proclaimed "Higher Crop Prices Permanent, Says Top Economist". I'll give him the benefit of the doubt that he didn't choose the actual wording of the headline, but any economist who suggests prices will stay high forever must have flunked Economics 101. It seems every time we have a monster rally, someone will always claim that it's the new paradigm. It's the flipside of when prices are in the dumpster and the pessimists say that things will never get better. The truism that the best cure for high prices is high prices still holds true (and always will).

Curious StatsCan Numbers
When we look at the Stats Canada acreage and production estimates, we have to wonder what happened to all those flooded acres. Earlier this summer, some very credible people were "guessing" that anywhere from 8.5 to 12.5 million acres. Oddly, the survey shows that "only" 5.5-5.8 million acres were unseeded. What gives? We know that reports often get exaggerated, especially when things are looking bad. Once again, it looks like we got sucked in by the doomsday predictions.
Wow, what a rally!
To quote Manuel, the bellhop from Barcelona in Fawlty Towers, “She’s a-crazy Mr. Fawlty!” That sentiment kind of sums up the recent action in ag markets. At first, the oilseeds were leading other markets higher, but now it’s wheat that’s screaming higher and pulling up other markets. I’ve heard a number of traders tell me that current prices aren’t justified based on the fundamentals. They tell me that wheat supplies are plentiful and there is no real shortage. But frankly, that doesn’t really matter.
An "oops" for durum

It looks like the CWB may have miscalculated a little when it restricted durum acceptance last year to 40% on Series A and 20% on Series B contracts. When the CWB severely limited durum delivery opportunities and sent out market outlooks that encouraged farmers to look for other outlets for their durum, the response was predictable.

Special Crops are Big Biz
Special crops aren’t really a specialty anymore. Canadian farmers are very good at diversifying, although some might say, they’ve been forced to. In any case, pulse crops now fit within the majors. This year, peas and lentils are vying with oats and durum for 4th place in the acreage derby. Meanwhile, acreage of crops like spring wheat and barley seem to be in a long-term decline (is this the year canola acres will overtake spring wheat?).