Opinion: Don’t forget about managing crop price risk

By the time you read this, spring should be well underway, with March behind us, the sun feeling good and the soil warming.

That sounds all warm and comfortable after a March that’s been steely cool and uninspiring in the weather department, but we’re coming into a summer of uncertainty that calls for farmers to dust off their marketing risk management.

This will finally be a spring without the pandemic hanging as much over our heads. People continue to be infected with COVID-19, but that will likely be a reality for most of the rest of our lives, as it has reached endemic status and we learn to live with it.

However, the economic gyrations post-pandemic are being felt in various ways by families and markets, as the prop-ups provided by governments have, rightly, dried up.

That’s meant deeply felt issues are moving through the economy, including repercussions of a period of interest escalation and the continuation of the pandemic cost of living increases.

It looks like inflation is cooling and with it, so should the pace of interest rate increases, but the effect of those changes are only now being felt, especially on the farm.

Farm Credit Canada’s J.P. Gervais says that higher interest rates aren’t yet cooling down the continuing rapid rise in farmland values.

Indeed, FCC’s most recent report says that Ontario farmland rates rose 19.4 per cent in 2022. Conversations I’ve had recently with real estate agents and farmers tell me that locally there are some extraordinary valuations on many farms, including popping through the $40,000 per acre value.

Almost every farm has its potential super value based on a combination of market timing, local specific demand and two motivated buyers. The super value line is being hit with more regularity these days, even with higher interest rates, and that’s a sign of a bubble.

It’s been a few good years in the agriculture industry, especially for those selling crops, as factors such as global increases in the need for grains, an increasingly demanding middle class in China and a war between two of the largest grain producers in the world, have brought most agriculture commodity prices to new levels.

However, as I’ve seen in other commodity super cycles, input prices are jumping as suppliers try to catch a greater portion of the profit farmers have been enjoying.

The challenge with that effect is that it often reaches its peak just before commodity prices decline.

We’ve seen the start of that decline across the board in major crops in the past month. The question is if it will continue.

I’m hearing more pessimism around crop pricing in 2023 than I’ve heard in a few years and somewhat of a consensus is emerging among crop analysts: 2022 was a year of good crop prices, 2023 will be ok, but 2024 could be less profitable.

Jim McCormick, co-founder of AgMarket.Net, was on the stage at the recent Grain Farmers of Ontario March Classic and he said that he’s expecting challenges in crops profitability soon.

Chinese demand doesn’t seem to be as hot, and the export deal to move grain out of Ukraine continues to be renewed.

Farmers haven’t needed to be as diligent with their marketing risk management. It’s been challenging not to sell at a profit, but the skills that help to price grain when it’s selling at a low price are important, and will likely be more so in the next couple of years.

The world has been a shifting mess of volatility for a few years, and in the grains world that’s meant more chance for higher prices.

While some of the volatility in areas that bump grains prices is declining, that’s a good chance that some of the other fundamentals affecting grain, including overall strong demand from a growing world population, mean that one good little disruption in the marketplace due to weather or politics can mean a return to the strong prices enjoyed in agriculture over the past several years.

But it would still be a good plan to revisit crop price risk management strategies.