New Crop Pricing Opportunities
As we push into the middle of January, amidst all the COVID-19 and politicking, pencil farming is hitting full tilt and producers and buyers alike try to secure some contracts and a sense of what Plant 2021 acres will look like. Future markets are gearing up for next WASDE report (out on Tuesday, Jan 12) are looking mostly at South American weather, trade restrictions (i.e. Argentina and Black Sea countries limiting exports), and general market impact of the ongoing COVID-19 pandemic and U.S. politics. In the meantime, the Canadian Loonie is sitting at 2.5-year highs, and given the unfortunate state of stately affairs in the U.S., there’s a strong likelihood that it could appreciate back above 80¢USD.
While lots of factors could prevent the Loonie from appreciating, there are two main variables I’m watching: (1) President-Elect Biden coming into office and, ideally, an aura of calming collaboration, and/or (2) the current Canadian government keeps spending like a Powerball lottery winner. For Canadian farmers, if the Canadian Dollar weakens, then basis levels usually improve, but if the Dollar goes higher, then basis levels usually get worse. Thus, if you’re thinking about new crop pricing for crops like wheat or canola, you have to be thinking about currency a little bit.
For hard red spring wheat, futures values have improved by a healthy amount compared to last month and a year ago. As basis levels are mostly flat compared to these periods, cash values are reflecting the current rise in futures, and so locking in some acres on a flat cash basis isn’t a bad idea. Accordingly, this is where it’s important to know your estimated costs of production AND average yield expectations. Therein, you should know how much your cost of production will change, per bushel, if your average yields actually turn out higher or lower than your average. Knowing these numbers now helps you better understand exactly where your grain marketing plan sits as the growing season unfolds.
For lower protein wheat, it’s a similar story to HRS wheat, as futures values have risen significantly, and with basis relatively flat, cash values are nearly 20% higher for new crop pricing opportunities compared to what they were a year ago. Can futures push higher on drought concerns? Will basis improve if the Canadian Loonie weakens? These are all unknowns and will impact your unpriced bushels. In order to reduce my exposure to these unknowns/risk, I’m comfortable locking in as much as 30% - 40% of expected 2021/22 production before I plant a seed (and potentially even more if I’m hedging those contracts in the futures markets). While supposed global drought issues could continue to bring higher premiums yet, you’ll still have more than half of the crop to sell and, what’s more, your hedges should help protect you as well (I’d recommend working with a professional if you’re not familiar with the hedging tools available to you).
While we tend to focus on wheat in this column, it’s hard to ignore the other major Western Canadian crop: canola. While new crop canola futures are now more than $100 CAD/MT below that of front-month contracts and cash values have a similar spread, basis levels for movement today are virtually the same as new crop movement periods. What this suggests is that locking in basis today, you can price any higher futures value between now and movement of said canola. This is important to note, as between now and then, futures values for front month and new crop are likely to converge, meaning new crop futures could increase a bit. Finally, compared to a month ago, today’s basis levels in Saskatchewan are telling us that a lot of new crop has already been bought (hence the basis in Saskatchewan widening in the past 30 days), and acres in the Land of Living Skies province are sure to increase.
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