Global economic woes keep canola trending lower

Posted on November 25, 2011 by farmlink marketing solutions

By: Phil Franz-Warkentin
Commodity News Service Canada

ICE Futures Canada canola contracts remained stuck in a steady downtrend Wednesday as the global economic uncertainty leading to speculative liquidation in many commodities spilled into grains and oilseeds as well.

While the fundamentals remain relatively supportive for canola, the ongoing economic uncertainty will likely keep the path of least resistance to the downside, according to analysts.

“Canola is being dragged down with everything else,” said analyst Jon Driedger of FarmLink Marketing Solutions in Winnipeg, pointing to recent losses in soybeans, crude oil and North American stocks.

In addition to speculative selling, buyers and end users, who may see good value at these prices, are still sitting on their hands waiting for the current economic turmoil to subside a little, said Driedger.

However, he said, the fundamentals are relatively solid for canola, with the strong basis levels available across Western Canada seen as a sign of the good demand.

Driedger expected continued strong demand from domestic processors and the export sector would temper the weakness coming from the outside markets to some extent.

From a technical standpoint, the January contract neared the psychological $500 per tonne level during the week, but could be headed toward a break below support at $496 per ton, according to Ron Frost of Frost Forecast Consulting in Calgary.

Bearish macroeconomic trends will keep canola pointed lower as well, he said, with the futures expected to trade in a new range between $466 and $496 once that support is broken.

While both Frost and Driedger said further losses were likely, they also allowed for the possibility of occasional corrective bounces, which would likely be seen as good selling opportunities.

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Government Backing Solidifies Future for New CWB

Posted on November 8, 2011 by farmlink marketing solutions

Legislation defining the future for the Canadian Wheat Board (CWB) has moved from the House to the Committee stage. MPs will be reviewing the details and considering minor amendments this week.

In the guts of Bill C-18 we find significant support from the federal government in the form of government-backed borrowings and initial payments for a period of up to five years. Many people were surprised to see such a deep and long-term commitment from Ottawa to help the CWB transition into a commercial organization. Likely, policymakers were responding to concerns raised last summer and fall that the timeline of August 1st, 2012 was too tight for all of the old-crop pool close-out issues to be dealt with while simultaneously determining the path to create a successful new organization.

At the same time, the legislation allows all buyers to contract grain directly from farmers (for delivery August 1st, 2012 forward) as soon as the Bill is passed and receives royal assent. This is expected to happen in December 2011.

So, in the not-too-distant future, we’re going to be facing new pricing opportunities for wheat, durum and barley from a wide variety of buyers. The contracts and their terms, the schedule and plan for taking delivery, and of course the prices, will all be new information for Prairie grain producers to interpret and make decisions about.

It’s too soon to say exactly what growers will be offered, but we do expect the offers to come from new and traditional buyers, including a voluntary CWB, who is also going to be bidding for non-Board crops. They got a great big carrot in the form of government financing of their grain inventories and working capital, to bring the grain handling companies to the table to negotiate fair handling agreements.

Shortly after getting feedback that their timeline for change was pretty tight, Ottawa heard concerns about the amount of operating capital the private grain trade would have to come up with. $1.5 billion was one credible consultant’s estimate of the amount of new financing the industry would need to access in order to handle farmers’ Board grains. While it doesn’t make this number go away, continued backing of initial payments by Ottawa for the CWB does reduce the financing burden of the elevators by whatever portion of the crop that the new CWB does handle.

Giving the trade this incentive to handle the new CWB’s grain further helps the organization’s chances of securing reasonable rates from the line companies for originating and trans-shipping grain to port on their behalf. This is critical to the CWB being able to earn farmers’ business through competitive country pricing.

It’s long been feared that the private trade would shut a voluntary Board out of the marketplace, but since Bill C-18 was tabled every one of the big 3 grain handlers has publicly stated their willingness to work together. Looking deeper into the initial financing terms the new CWB has been given, and the positive implications for its handling partners, these are credible claims.

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Strong Hands

Posted on November 1, 2011 by farmlink marketing solutions

As the transition towards an open market system evolves, we’ve been hearing the comment more frequently about what a big deal it is that wheat will now be a ‘cash crop’. Indeed, being able to generate cash flow on demand from wheat will greatly improve individual producers’ ability to make good, successful grain marketing decisions.
In the fall, many producers have often been forced to sell non-Board grains in order to generate cash to pay the bills, or because they’ve run out of bin space and there’s only been a 25% contract call on wheat. Being forced to sell crops when the market is signalling not to comes with a cost. That cost is equal to the price the farmer gets when they are forced to move it, compared to the higher price that comes available afterwards.
It’s impossible to know exactly what price might have been achieved if the farm hadn’t been forced to sell at an inopportune time. Saying that fall is an inopportune time to sell further assumes that one’s forecast for the non-Board market to rise post-harvest was accurate.
Much of the fear that farm prices will end up in the bottom end of the range without the CWB and mandatory pooling is unfounded. Market analysis works, and farmers have been investing in effective market research and opinions about future price direction for years. Even in wheat in recent years, forecasting price direction is the way farmers made decisions about whether to choose the CWB’s cash price (Fixed Price Contract) on a particular day, or to wait.
They don’t always post the lows of the year in September, but canola, peas, oats and other non-Board markets do face seasonal price pressure in the fall. The vast majority of distress-type sales end up happening in the post-harvest period, sometimes due to the inability to move more wheat. Allowing crops to move off farms to market in this way is weak. Better prices are achieved by farms that hold their crop in strong hands.
‘Strong hands’ is a grain industry term that refers to the skill of buying and selling at the most opportune times. Through contact with other buyers and sellers, traders maintain a sense of how badly the market wants to own or get rid of grain stocks at any particular time, and responds by either offering or holding back their own market interest accordingly.
To develop ‘strong hands’ will involve monitoring and sensing market tone on an ongoing basis, which will be new to some producers. But in all cases, it starts with removing restrictions from positioning the farm to sell according to market signals post-harvest. Next year, Prairie farms’ ability to get to this position will be greatly facilitated by the ability to use wheat as a cash crop.

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Comparing Wheat Values

Posted on October 14, 2011 by farmlink marketing solutions

One of the arguments commonly put forth in the CWB debate by proponents of marketing choice is that they see higher cash bids on the U.S. side of the border than what is available through the CWB. The pro-monopoly response to this is that these values don’t reflect the price that the CWB would receive on world markets, and that most producers don’t have access to these elevators anyway.

While some of these rebuffs are valid, and a pure comparison between current U.S. elevator bids and the CWB PROs or Fixed Price Contract values is a bit oversimplified, periodically examining this relationship does shed some light on the price that the CWB is willing to allow Prairie producers to lock in on one of their Producer Pricing Options.

For example, recent elevator bids in the northern U.S. showed a basis level of between 35 cents and 60 cents per bushel under the Minneapolis December futures contract for delivery this fall for 14% protein hard red spring wheat. In comparison, the CWB Basis in-store for #1 CWRS 13.5% was $36.93 per tonne under the December futures after including the Adjustment Factor. If we assume deductions of $55 per tonne back to the grower from the in-store value, the comparable ‘basis’ is about minusd $92 per tonne, or $2.50 per bushel under the December futures.

This puts the difference between what a northern U.S. elevator will pay a farmer today and what the CWB will allow growers to lock in is approximately $2/bu. Although this comparison isn’t purely apples-to-apples, they are close enough to know that this spread is enormously wide.

Whether deliberate or not, what this big discount essentially does is heavily penalize those growers that try to make proactive decisions in managing price risk and locking in margins, to the point that this becomes implied mandatory pooling, even if other pricing options are offered. It’s also these types of price relationships that increasingly frustrate growers who might otherwise be more sympathetic to some of the pro-monopoly supporters.

There are many aspects to the CWB debate that need to be considered. And perhaps there are numerous ways that the CWB adds value to growers. But it’s certainly not through offering competitive values through their PPO programs. The current spread may be egregiously wide, but history has consistently shown their values to lag by a wide margin (hence the removal of the popular Daily Price Contract a few years ago, whose value was directly tied to an unbiased U.S. elevator bid calculation). And so far their explanations for these price discrepancies have been unsatisfactory.

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Market Analysis Vs. Average Pricing

Posted on September 28, 2011 by farmlink marketing solutions

At the core of the current debate about the value of the Canadian Wheat Board (CWB) monopoly is the question of whether an individual producer can ever expect to do better than ‘average’ in pricing their crop. It speaks to the economic theory that farmers are price takers, and asks the question, does market analysis work to achieve above-average prices?
The CWB’s sales policy was founded on the assumption that farmers are price takers, which means that they can’t control the price they are paid for their crop. Their marketing activities are designed to achieve an average price because the assumption is that this is the best possible outcome, short of just being straight lucky.

While it’s true that an individual farmer’s decision to sell or to hold back his or her crop on any given day won’t affect prices broadly, it’s a complete misuse of that assumption to say that farmers are helpless in the marketplace.

Market analysis tools including consultants, a broad range of newsletters, web sites and other information resources are widely available to producers today. At the time the CWB was put in place over half a century ago producers had literally no way to access price information outside their local community. Technology and access to information in real-time has completely revolutionized the balance of information power that farmers have compared to the days of pre-World War II.

Between then and now, many farmers have been increasing their awareness of the overall grain markets while others have spent their marketing energies trying to protect the CWB monopoly. Herein lies the divisiveness: some farmers are taking control of marketing using new tools at their disposal because they believe that market analysis works to achieve better prices; others want the CWB to maintain control because they don’t believe that any other tools work to get above-average prices for their crops.

No self-respecting market analyst would ever claim that they can perfectly predict prices in the future, particularly when looking out beyond the next couple of months. Nobody has a crystal ball; that’s the first thing you learn in grain marketing. But there is no question that market analysis works to achieve above-average prices in selling a crop. This includes not just making informed decisions about the direction of grain prices overall, but also in how to extract extra value out of the market from other actions such as the timing of delivery windows, forecasting local basis levels, and on weighting sales towards crops that have relatively less upside potential than others.

Make no mistake, market analysis does take a lot of work. For example, FarmLink employs four full-time experienced professional former traders who do nothing else all day except to research the markets, forecast prices and make decisions about when to advise our farm clients sell. While we still have times when we recommend pricing grain too early or too late, our overall performance in terms of where we end up in the range of available prices for the year is pretty good as a result.

If a producer has the expectation that they can’t make market analysis work to achieve better prices, then a random or average approach to making selling decisions is going to work as good as anything. You won’t sell much at the highs, but you’ll also avoid selling too much at the lows as well. However, never before have producers had the ability to take more control of their business and achieve better results through the use of tools that are widely available and easily accessible to anyone.

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