No Déjà Vu in 2015: In Agriculture Change is Our Only Constant

IMG_3141     I’m now into my 29th year of writing this column; hard to believe I was such a young man when this started.  Back in the day, I actually wrote in long hand.  For those of you embracing your youth, that’s what we did without a typewriter, put pen to paper and scratch things out.  I suppose it gives me perspective over time.  I’ll let you be the judge of that.

2014 was another year of change in agriculture, where change is our only constant.  You might say the weather was extreme or market conditions were the same, but plain and simple in this business, you just never know.  Every year is different.  We can learn from the past, but every year presents management challenges, which always take new approaches.

In Canadian agriculture this year, “the” story was the continuing precipitous drop in the Canadian dollar down into the 85 cent US level.  I made that argument last year, but it continued, especially at a time when the US dollar decided to break through the 90-point index level.  With the value of a barrel of oil dropping by 50% over a six-month period, the loonie didn’t have much mojo.  Canadian grain and livestock cash prices were buoyed, especially at a time when those prices were moving in opposite directions.

At the same time, interest rates stayed low, with the Bank of Canada overnight lending rate stuck at 1%.  In many ways, this has almost become a “non-issue”.  Cheap money is cheap money, boosting capital asset values beyond what we’ve become accustomed to.  Land prices of $15000 to 17000 an acres for good land in SW Ontario are reflective of that.  Even higher prices for land in other parts of the province reflect the cheap cost of capital.  If you want, you can buy some new iron in the same vein.  A dollar down has never gone so far with regard to debt servicing payments.

Of course, I shorted the Ruble, the Russian currency! LOL.  The wheat market was at the end of a Russian whip this past year; reacting to the military tensions in the region, post Sochi.  When oil started retreating, the Russian economy became even more suspect, which again put focus on cutting wheat exports from the Black Sea region.  It’s like a virus, which you can’t make go away.  As 2014 ends, all of this is still in play and it will surely continue into 2015 as western sanctions continue.  Wheat so vilified by market observers will continue to be affected by the Russian bear.

The partial neonic ban on seeds planted in Ontario starting in 2017 raised a lot of shackles in Ontario in 2014.  However, the biggest screams are coming from big Ag who overshot its use.  This at least gives them time to come up with something else, and charge more another day.  Politics can be messy and the neonic issue in Ontario is about that.  Its just another challenge we face as we move forward.

Rail issues in Western Canada continued in 2014. In fact, its chronic, still not fixed.  I don’t know if we’ll ever get there.  As it is, cash grain basis was almost “legalized theft” compared to similar arbitrage opportunities in Eastern Canada.  It’s a market structure problem, which needs to be fixed, but I don’t know where to start first.  With a federal election coming in October, there surely will be more vitriol hurled at that problem this year.

Freer trade issues continue to dog Eastern Canadian agriculture.  The CETA or Comprehensive Economic Trade Agreement with the EU gave greater access to European cheese hurting the Quebec and Ontario dairy economy.  This fight continues and surely may result in big protests in Quebec in 2015.

With this as a backdrop, in 2015 we’ll simply have to adjust from it and move ahead. Oil will likely stay low but start moving up.  The reality is it’ll still be cheap which ultimately will affect the ethanol market and the corn market.  However, any action in grains in 2015 will be predicated with what looks like another record South American crop this winter as well as weather, acres and planting issues for North America this summer.

What’s for sure is the vicious cycle of agriculture efficiency will continue.  Profits will be reinvested back into our farm businesses to use new technology making us more productive.   This will ultimately pressure our prices and revenues hastening the cycle once more.  Mother nature will laugh.  At the end of the day, we’ll all hope to come out ahead.  Risk management will never get old.  Then, we simply have to let the chips fall where they may.  Happy New Year!

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