Rural Voice Market Commentary – January 2023

by: Scott Krakar

Inflation is on the mind of anyone who purchases anything these days.  Most households show unease about the cost of living, with the rising cost of food and fuel being at the forefront of these concerns.  Inflation has been dubbed the “silent thief” as inflation reduces the purchasing power of money, lowering the value of money.  Why do prices go higher in times of inflation?  Simply if a dollar becomes worth less value, then logically it takes more of these dollars to buy real goods over time.  At times of increasing inflation, households get squeezed, as income growth often does not move directly higher along with the upward movement of prices.  It is because of the lack of purchasing power that individuals show concern over inflation, as this reality becomes apparent through tightened home budgets.

It is not only individuals that are concerned with inflation.   Central bankers of the world, those tasked with targeting a nation’s inflation rate, continue on their quest for lower inflation aggressively.   The Bank of Canada controls the money supply in this nation, along with Canadian interest rates.  The Bank’s targeted inflation is 2% per year, an inflation rate target similar to other developed nations of the world.  As tools to control inflation central banks can raise and lower the actual amount of money within the Canadian economy and change interest rates.  Increasing the money supply is called Quantitative easing, while decreasing the money supply is called Quantitative tightening.  For years the central banks of the world have been Quantitive easing as a way to stimulate the economy.  Putting more money into the system would act as a stimulus to economic growth, especially when combined with low interest rates.  This has been their course for quite some time, reaching back as far as the financial crisis and continuing through the Covid period.

The longstanding economic policy of central bankers lulled everyone into complacency.  Generally the thought of many was that interest rates could not increase much and even when inflation did begin to rise, it would be short lived and any bounce in rates would be slight if they were to occur.  Even the central bankers of the world voiced this opinion publicly, with many often repeating that the inflationary forces of Covid policies would be transitory – they would be short lived and then go away.  In actuality, inflation showed itself not to be transitory, it is aggressive and seems to be a foe that central bankers are now attacking vigilantly with aggressively higher interest rates, with rates essentially tripling since the move higher began.  Their hope is that increasing rates will noticeably reduce the demand for goods and services.  Because households and businesses have increased debt loads, higher interest rates will increase debt servicing needs, leaving less money to pursue goods and services.  The lower demand for these items would in turn lower prices or at very minimum slow the rapid increase in price.

This conversation brings us to commodity prices and the effect that Quantitative tightening and interest rates have on commodity values, including agricultural markets.  Commodity futures are “investment assets” to many institutions and financial funds.  As money supplies shrink and the cost of borrowing increases, there is less financial demand for asset classes such as grain futures that a speculator may buy when money is cheap to borrow.   A financial manager is reluctant to buy assets with hopes of gain, that comes with a growing financing charge through higher borrowing rates.  As a result of the lower interest by financial investors prices do not have an incentive to rise, but rather fall due to lack of buyers.  This in part, explains the falling grain prices that we have experienced through the end of 2022 and to begin 2023.

Grain prices are also weakening as there just isn’t the fundamental story to support higher values in today’s environment.  Ukraine is still an aggressive shipper and has had great success in shipping given the conditions of war.  This season Ukraine has shipped 23.6 million metric tonnes of grain.  This represents good volume however is down 29.6% from last year due to the on going conflict.  Into the new crop growing season, it is important to note that the major grain growing regions are not in the primary conflict zone in the Ukraine.  Therefore unless the conflict zone becomes larger and spreads to these regions, grain production for the coming season is likely to be in line with expectations assuming that farmers have the access to inputs and capital to operate.

Major wheat shippers of the world have had large crops this season and are ready sellers.  Russia and Australia have produced record size crops this year.  These 2 nations represent around 30% of global wheat exports on average and therefore their large crops are significant in satisfying world demand.  Canada as we know, is also a major world shipper and stocks here have stabilized to around the 5 year average inventory.

Looking ahead to new crop wheat, there are manty areas where drought is of concern.  The US Hard Red Winter crop in the Plains is rated in one of the worst conditions ever.  Northern Africa and the EU are both dry and may see reduced crop sizes going forward also.  The market today is not showing concern over these potentially distant worries.  Market attention is focused rather on the realities of today’s problems of adequate supply and financial market demand… and prices wane.