Rural Voice Market Commentary – February 2023
by: Scott Krakar
At their latest interest rate announcement meeting, the Bank of Canada once again raised interest rates. This increase was a continuation of the aggressive rate expansion period that began in early 2022, in an effort to lower inflationary forces. At their press conference briefing after the announcement of higher rates, the bank specifically stated that they will now look to pause interest rate hikes, for the time being at least, and observe whether the increase in rates was sufficient to bring down inflationary pressures sufficiently. While a consensus among pundits is generally not found, a thought that seems well presented is that the bank may have a strategy of holding rates steady now, for at least the remaining balance of 2023. While some analysts report that the bank may cut rates in late 2023, it seems likely that the bank will be cautious in lowering rates too early as they do not wish to repeat the effect that occurred in the 1970’s, a time that similarly experienced high inflation. So what happened in the 1970’s? Interest rate hikes brought down inflation, similar to what we are experiencing now, and while this was occurring central banks were quick to lower rates along with the lower inflation, just to see inflation spike to a higher level as the economy was stimulated with the falling interest rate environment shortly thereafter. Therefore the thought is that at the earliest, assuming today’s interest rates are high enough to produce their desired effect, that rates will likely not be lowered until some time at the earliest until 2024. Furthermore, if rates do decrease into the future, the expectation is that they will likely not return to the emergency levels (near zero) that they have been for quite an extended period. A moderation of rates toward the middle of the range of where they have been and where we are now currently is assumed longer term.
Ukraine grain exports have essentially normalized compared to longer term seasonal averages, despite the ongoing conflict. This demonstrates the great success of the Black Sea Grain initiative signed between the Ukraine, Russia, Turkey and the United Nations which allowed the reopening of vessel traffic from Ukraine. During the months of September and October 2022 the Ukraine actually shipped higher volumes of corn and wheat compared to the 5 year average pace prior to the invasion. During the month of December Ukraine loaded and shipped the highest volume of grain since the beginning of the conflict, exporting more than 3 million metric tons of corn and 1.6 million tons of wheat. The shipping agreement, originally signed in July of 2022 has been key in allowing international shipping from the important exporting nation and is due to expire in mid- March. Some are showing concern that the shipping agreement may not be extended upon expiration. The decision on whether to extend the agreement will likely depend on the development of the war. Fears today centre around a potential escalation of tensions with Western nations sending tanks to Ukraine. Russia is showing its disapproval of this military assistance and escalation talking points have been frequent from the Kremlin. Many political watchers suggest that Russia will in all likelihood ramp up its offensive. There is speculation that Russia will target more agricultural infrastructure in an effort to do major harm to Ukraine’s main economic engine, which is agricultural exports. While this threat is real and could happen, it is the short term, nearby conditions that the market is focused on today. In respect to wheat, the market focus is current demand and the US Hard Red winter wheat is the most expensive in the world. The Black sea dominates the world export market and will do so for some time as they clear large surplus production.
Most grain market talk and price movements have been centered around the weather conditions in Argentina. The country has been experiencing major drought and heat, and this has left their crops in poor condition as they wait for rains. This has created a choppy marketplace as weather forecasts change frequently. While there have been some widespread showers at times when the crop
desperately needed it, the drought remains and much precipitation is required to stabilize and improve conditions. If weather models show a moderation of the crop conditions and the crop is viewed to stabilize, market focus will then shift to weather conditions in other regions, such as the second crop corn production in Brazil. Currently 12% of Brazil’s second crop corn is planted, compared to 24% planted this time last year.
Brazil, while turning dry now also, has seen good production expectations. Currently Brazil has record high corn export commitments for this time of year, at 8.9 million metric tons. Brazil has now emerged as a major shipper to China, demonstrated by 18% of Brazilian corn exports in December, shipped to China. Estimates are for Brazil to ship 15 million tons of corn to China this year. In January record corn exports were shipped from the nation, with 6.4 million tons exported to various destinations. These record high exports were 2 million metric tonnes above the previous record export of 4.4 million metric tonnes that were shipped in January 2016. It is not only the corn crop that will be big in Brazil, as the soy crop is also expected to be record sized.