A World of Uncertainty

Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

I've been reading a variety of articles and commentaries lately in which the authors have expressed concern about the current state of the commodity market, specifically grains and the effects globally. The term “risk management” for those of us in all aspects of production agriculture has turned into a new and more complicated challenge.

Price is affected by weather, transportation, exports, prices of competing grains and basic supply and demand dynamics. The last couple of years, to add to that matrix, is the influence of energy, primarily oil. Last, but not least, is the “clout”, of the Index Funds, and the extreme volatility they’ve created. This group has created a very unstable erratic environment. High prices and extreme volatility have created a huge risk environment for our traditional hedgers leading to the demise of a cash price system producers have had the luxury of using for decades.

Grain stocks can be categorized as domestic or local and global. We can see local supply and demand demographics move price through basis. When global stocks are thin, we’ve seen that the market can change in size and complexity. In six of the last eight years, the world has consumed more grain than it has produced. This gradual draw down in stocks has created a powerful export situation. Of course it’s not just about exporting grain but the value of world currencies and the influence of this on price and the rationing process. The rising global population has increased demand, especially from the developing countries such as China and India. These are the two largest world populations and they have been growing at three to four times the rate of the developed world. Their governments’ increased willingness to pay extremely high prices for commodities to ensure food security has caused the global commodity markets to become more inelastic than once thought. Some major grain producing countries have reduced, or shut off for periods, export of their grains, placing pressure on pricing and rationing.

As it stands today, more acres are needed in production agriculture to meet the new rate of global growth. It is uncertain how high prices need to be to encourage land into production or out of set aside. First and foremost, it is important that reductions in trade barriers through the multilateral WTO Doha Round be accomplished. Figures indicate approximately one third of the world’s exporting countries are shielding their consuming population and producers from global prices, having created more extreme supply demand situations throughout the world. The world trade deal, which has been in the making for six years, requires negotiators break the continued impasse over distorted subsidies and reach an agreement. Growing unrest over escalating food prices is being seen around the world, especially in countries that spend a large percentage of their budgets on food.

For so many years, producers have received marginal payment for their products in which there was a need for subsidization by governments to sustain income allowing farm businesses to be viable. High commodity prices are bitter sweet, as input costs have risen as well, creating challenges for increased margin potential. Prices may stay high as supplies adjust to the current and upcoming demand. Although agriculture is at an interesting cross road, one aspect of history will repeat itself – farmers around the world will do everything possible to grow as much
grain as possible, Mother Nature permitting. More than any other time in history there are more questions than answers. As producers, you need to be proactive in managing this new risk environment both on the expense and revenue side of the balance sheet. There are vast theories on if, how and when this commodity boom will unfold. You need to critically examine the daily barrage of confusing information you receive in order to focus on your business balance sheet to ensure success. Planning for the future will create profitability and a smooth transition as dynamics shift.