Agriculture

How hot is the price?

Commodity prices have been strong for the past eight months. This is good for producers, but long-term decent returns can distort production costs.

Canadian producers can face significant financial difficulties after rising costs if price declines and major production challenges persist, as experienced in the 1970s and 1980s.

Why it’s important: Good crop prices and long-term inflation can change farmers’ production cost measurements. Recalling past highs and lows can highlight where and how vulnerable farming is.

Grain prices began to rise gradually after the coronavirus in the spring of 2020, but the corn and soybean markets were boosted by a sudden and significant increase in demand from China. Declining yields in the United States and production in South America Combined with the pressure of climate change on soybeans, soybeans have reached record levels.

“That’s why futures prices have risen so much. That’s not yet at record levels, but soybean cash prices have risen,” said the Ontario grain farmer’s market. According to Philip Shaw, the author of the trend report.

“This raised prices that we couldn’t imagine a year or six months ago. Now we are in a position to need large American crops to build our supply.

“Brazil’s soybean supply was record-breaking, but the price was fine. It was getting higher and higher.”

The case of China reflects a policy change adopted by another red country, the Soviet Union of Socialist Republics, which no longer exists.

In 1972, the Soviet Union suddenly increased its grain purchases significantly. Terry Danard, a farmer in the Guelph region who worked for the University of Guelph and a corn producer in Ontario, recalled two major price increases over the next eight years.

“They just started buying. At first no one was paying too much attention, but it was growing. Speculators were involved and prices went up,” says Danard. Good prices weren’t continuous, but he remembers that time as “a really good time for grain farmers.”

Inflation, interest rates, creditor policies

As in China today, the sudden demand from the Soviet Union has contributed to a generally decent time for grain producers. Alphonse Welsink, a professor of food, agriculture and resource economics at the University of Guelph, said the weather. It also states that supply problems caused by the Soviet Union, namely the dryness of the prairie of Brazil, the Midwestern United States and Canada, also occurred in the early 1970s. Concerns about general inflation, as well as grain and food prices, are one of the similarities to modern times.

However, there are significant differences between those days and the present, such as the significant drop in inflationary pressures in recent years. As a result, the upward pressure on interest rates has diminished.

Soybean prices have increased commodity prices over the past year. The increase includes many farm inputs, including corn, wheat, oil, and equipment.

Photo:
Graph: barchart.com

Inflationary winds have become more volatile in recent months, Weersink said. He cited price trends for land, food and housing.

“It could bring about higher interest rates, which led to the agricultural financial crisis of the mid-1980s,” he says.

“We haven’t been shaken in the industry for a long time. Hopefully it’s not a big problem.”

Danard remembers the tough days of the 1980s when interest rates were above 22% prime. He saw neighbors and colleagues lose their shirts when aggressive anti-inflationary behavior merged with commodity lows.

Further exacerbating the problem was the misbehavior of many financial institutions.

Danard says the lender has seized a farmer in unfortunate financial hardship. He believes the lessons were ultimately learned, but was initially unaware that these actions made the situation worse.

Former Vice President of Farm Credit Canada and veteran of Farm Finance, John Gruchens expressed similar sentiment, with the number of financial institutions competing for farm customers and their in difficult times. Added greater willingness to work with. Now much more important.

Historical production cost lessons

Aside from the differences, Danard wonders if collective memory recalls the inclusive elements of the vulnerability equation: the calculation of production costs is based on high prices.

“It’s dangerous to trade at a very high price for a period of time. People are incorporating it into their cost structure,” says Daynard.

“Unfortunately, the most vulnerable are the innovative people you want. When buying farmland for $ 40,000 per acre, it’s hard to decide how to do it. It’s very difficult. “

Weersink and Daynard agree that no one can accurately predict price and inflation patterns. Despite some similarities to what it was 35 or 40 years ago, modern differences suggest that exact repetition is unlikely to occur.

But history doesn’t always repeat, and as Danard says, it can rhyme.

https://farmtario.com/news/how-hot-can-prices-get/ How hot is the price?

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