MAKE Podcast
MAKE Podcast
Dynamics of the current supply and demand for canola and wheat
Canadian grain and oilseed sales make up a lion share of farm income in Canada and Manitoba. Canola and wheat prices have been relatively stable since 2008 despite bumper crops and droughts in western Canada. The recent price spikes in the spring of 2022 were well outside all forecasts. Dr. Derek Brewin, Head of Agribusiness and Agricultural Economics, University of Manitoba, and David Simonot, Crops Intelligence Specialist at Manitoba Agriculture, discuss the dynamics of the current supply and demand for canola and wheat and discuss some possible drivers for the rapid price rise this spring.
The way we grow and produce food is ever changing, shaped by consumers and the climate in which we live in farm research at all points of our food system is essential for continuously improving food's journey from farm to table, the Manitoba Agriculture and Food Knowledge Exchange explores timely research innovations and applications, that make our food system better than ever, join us for today's podcast.
Derek Brewin:Hi, everyone. Welcome to the MAKE podcast for this week. My name is Derek Brewin, I'm head of the department of Agribusiness and Agricultural Economics at the University of Manitoba. We're here to discuss commodity price spikes. And my guest is David Simonot.
David Simonot:Thank you, Derek, and welcome everyone, David Simonot with Manitoba agriculture and I'm an intelligent specialist on crops. So I spend my time studying and keeping track of crop production, crop prices, world traded crops, and anything to do with crops.
Derek Brewin:And Dave's group provides some of the price information that is very useful. If you're a farmer to see, especially to look at prices, price patterns over time, and what prices are doing each week, that's a great service for us academics to track and for our students to kind of where real prices are. So I teach agriculture marketing, I've written 2 articles on the grain supply chain's response to COVID in the Canadian Journal, on economics. The last 2 years in both of those articles, I was suggesting that the industry's response to COVID was kind of muted that impact on grain prices was minor, that the grain supply chain might have even benefited from less demand for transportation services from other sectors. But since early 2021, the world price of wheat and canola have continually climbed upwards for canola. We hit record highs in may of 2022 of$1, 219.00 A ton or$27 a bushel. That price is 2.2 times higher than it was for an average price in 2019. And now since that was around$500. 00 a ton since May, the price has fallen$360. 00 a ton. Which is a huge piece of price variation that farmers have faced over the last few weeks, that kind of price spike and falloff is very difficult for us to model. It's kind of outside past trends and it's outside our recent experiences. So that's why I've asked Dave to come in, kind of talked to us about that. And Dave, the wheat prices had had a similar kinda shift as canola.
David Simonot:Yeah, that's correct Derek wheat and other crops as well, but wheat, especially the timing was slightly different. I think it started a little later than canola and carried on a bit differently. But basically wheat started at around$7. 00 a bushel, which is$250.00 or so Canadian dollars per ton. And like I say, it took a little longer than canola to ramp up, but it did, basically double to about$14.00 a bushel about$500. 00 a ton. And that was just this past spring. And recently it's tailed off almost as abruptly as it came up. And right now we're about halfway back down at$400.00 some dollars a ton, but it's moving so much every day. The volatility, the amount of movement is also pretty unusual in the history of these markets.
Derek Brewin:So just a little bit of economics 101 for some folks that don't know this market really well, but it's sort of generally true that food has an in elastic demand, that it's a small part of a lot of people's budgets. And so a price can move around a lot and the consumption doesn't change that much. That's why, you know, when economists write articles about demand for food, they don't... they can be kind of right. A lot of the time by saying we're not gonna adjust our demand that much, but we do have very inelastic short term supply functions as well because it takes an entire year for us to grow the next crop. So for, from now, till the end of next crop year, there's not much we can do to respond to a price spike or a price fall up. So that combination of a demand that doesn't shift very much meeting a shortage can lead to a big price spike up. So I think that's, it's kind of technically, what's behind most of the price jumps is we get into inelastic demand with no supply at all. But that's not really true that the world doesn't have a big supply of oil seeds and grains. Right now, we are actually even when we were seeing some of the price spikes and it was happening when the Ukraine conflict had started. Ukraine is a big grower of rape seed, but most of that rape seed was already grown. It was gonna be okay because it, and a bunch of it was on the Eastern side of, uh, or the Western side of the Ukraine. So that wasn't a big thing. There is sunflower seeds on the Western side of the Ukraine, which could have an impact on the overall world, sunflower oil seed market. That's relatively small, that's not, what's driving up the price of oil seeds in Canada. We did have a bad canola crop last year. But that should have, if that was gonna affect the canola market, should have happened a lot sooner than May of this year. So we're all a little bit thinking about what caused that price.
David Simonot:Yeah, and there's, as an economist, as a student of markets, it is absolutely an interesting time to be watching this because, as you just said Derek, if it was simply the shortage of the crop, what we've seen in the past, if you go to crop shortage, you sort of see it coming as the crop is developing into harvest the market reacts. And by the time the crop is harvested, the reaction is basically done. The market is settled on what they think, what the price should be, probably to carry through that year until the next crop arise. But that, isn't what we saw this time. We saw a ramping up and then it just kept going further and further. And there seemed to be a little explanation for exactly what was going on. So the other things, Derek you've talked about, about the war that obviously changes economic calculations and expectations for the future. And we've come out of COVID. I guess we haven't yet, but we... we've certainly had this backdrop of COVID for the last 2 years where people's behavior has had to change. We've seen these lockdowns where you had to buy your goods early, so you have to stockpile much more than you would normally. And you've also seen shortages of things that we hadn't seen previously yeah. So people's behavior is quite different when you don't know when the next opportunity to buy that will be how much do I need to buy?
Derek Brewin:Yeah. And through the entire supply chain of oil, if you're supplying canola oil to the rest of the world, there's a storage and movement of the oil seed. There's people that crush the oil, that store the seed at the crushing plant, they create oil and store some of the oil at the crushing plant. Then they store some of it at the place, they bottle it and then people store it in the shelves and then you, the consumer, sometimes store it. And so that demand for the stocks of it themselves and stocks is what we used to track. How high are the world's largest, the stocks of given commodities that used to drive price, but you were mentioning, pay off the stocks with inflation as a factor here.
David Simonot:Yes. I neglected to mention inflation that just perked up in the last 5, 6 months here, seemingly catching most of the world off guard. I mean, we had been through the pandemic, you know, you're stock up on your toilet paper and your food supplies, just because you didn't know when you would get it next. Personally, me, I wasn't necessarily worried that the price was gonna change. But then in the past few months we've seen the price of everything start moving it, that adds a whole different layer because now if I think the price of a bottle of can oil is going to be 20% higher a month from now. Well, that gives me a whole additional incentive to buy more. Now, if I can, if I can afford to all of the consumers, who have the capacity to stock up a little bit, it's almost like a good investment. You're saving money by buying more today. So when you think of that on a... in an aggregate on a global scale, if everyone buys one more bottle earlier, that's a lot more demand, suddenly. And that's in that period of time, like everything is measured through time here. And that impact, I think is quite unusual because we haven't seen, you know, aside from the stockpiling in the COVID, we haven't seen this kind of consumer behavior. And if anything, our economic system over the last several decades has benefited greatly from efficiency of, you know, maintaining minimal stocks and just in time delivery and all of these things that paid off well, until the system started to break down and have delays, and weren't able to supply, you know, the products we were used to in a timely manner. So all of these things are feeding into a demand to stockpile, which really wasn't there until very recently. So it's like a new layer of demand.
Derek Brewin:But I think as soon as inflation starts to slow down that stockpile is a rush back in. And I think Alphonse Wezin is the lead author of an article in agriculture systems that went through this. Especially in the meat supply chains, that when they had the, some of the blockages in the red... in all the meat supply chains and the first year of COVID. They had these price spikes and then came back to earth relatively quickly. And I think it's because there was this actually storage. Like there was animals pushing into the plants when they were shut down. So when they started up, there was lots of supply and it drove the prices back down relatively fast. And I think we could see all those stock that people were worried about when they start to get to relax or the payoff to the supply of the storage gets, if it ever went negative, if we ever had a deflationary period, it would fly onto the marketplace cause a rush back down to low prices.
David Simonot:Yes, and that is often what you see in markets when there is a sudden price spike, the drop back down is often just as drastic, just as sharp and just as unpredictable. And it's for that very reason that you described. And I think it's hard to predict when exactly that will happen. And when you're talking about agricultural products like canola or wheat, that's the progress through the supply chain, through the processing transportation change. There is some amount of product stored at each of those steps, as you mentioned, and you can have a surplus at 1 step at a shortage at the next. And right now all the logistical difficulties we're having are creating this kind of noise. But as you say, when it starts to work itself out, it'll just release. And I think we've seen that a little bit just recently on canola and wheat and seen the markets come back a little bit. There's some of the edges of that panic has subsided a bit, and it's hard to say now, when, where do we settle?
Derek Brewin:Yeah, I feel like we owe... so first off, if you'd like to learn more about this, please take Agricultural, Agribusiness and Agricultural Economics at the University of Manitoba or Dave might say, University of Saskatchewan's an okay operation as well. I feel like maybe we should almost apologize to farmers for saying, we don't really know whether or not this is a good time to sell. I think the crop... we still have hail... crops cut through with golf size balls, going through there and signing to grow for, even though it's come down$360. 00, it's still a really high price and promising to deliver$850. 00 canola right now, and then not getting the crop and the market could do some more drastic falling. It could get back to, so we all watched this happen in 2012 where the... they sold a whole bunch of the spring crop at a fairly high price because it was a really good, historical price. And then the price went even higher that fall. I think we're kind of further along than that, on kind of the impacts of this market. But I dunno, I honestly, I apologize for not knowing more about that. It used to be predicting a$500.00 bail of wheat, was you felt somewhat confident, but nowadays it like a really, really hard price to nail down.
David Simonot:Well, and I have to admit, Derek the decades now that I've spent watching markets have only taught me that I am not able to predict what's gonna happen tomorrow, never mind what's gonna happen in 3 months. And these markets have absolutely hammered that lesson home again. So what I've said today, I wasn't, as you've noted, I, and I apologize as well if there are producers listening and it wasn't intended as advice. It is a difficult, difficult time to be a producer right now with the amount of volatility in pricing. So not only do you have to try to market a crop that for most of the year, you're not even sure how much you're gonna produce because there's mother nature at play, but we've also seen as we've referred to the inflationary aspects, like the cost of inputs. The price of energy that affect everyone, but certainly farmers of your oil and your fuel and the fertilizer market would be a whole other market we could touch on. Like the economics, there's so much, so many moving parts right now that is really hard to make a prediction and make a... give some advice that is specific in general because each situation is different as well.
Derek Brewin:Yeah. I think the best you can do is kind of look at that budget at the beginning of the year and is that the crop that's most likely gonna make money if I have an average year? I mean, I think that's still a good practice, but the marketing side, I think just given the vagaries of this market, it's really scary to price very much until, God you had to bid.
David Simonot:Yes. And there were last year 2021, there were many producers who experienced a pretty significant crop failure. And if you've priced crop that you end up not producing, that's a very risky and negative outcome. So I think quite a few are keeping that in mind as they're planning their... making their plans at the moment as well.
Derek Brewin:Yeah. That being said$1,219. 00. I bet the price for November deliveries will also spike in May. So I... you know, I think it was, there was a time there. It would probably been a really good time to lock in sale, but if you didn't produce it and then you had to show up and sell it would be expensive. It might not be if it drops down, I guess you could buy it for not that much. I think we've kind covered everything I wanted to talk about, Dave and it's approaching a g ood t ime t o s hut i t down.
David Simonot:I think that's all... the one thing that we we've talked around, I think, but we've talked about how interesting this time is. And I guess I have it in the back of my mind, but maybe we haven't said it front, and this is sort of compared to the usual boring time or the usual. And there have been interesting times over the last couple decades as well, but none are quite as wild as what we've seen. And often it's when analysts and people who study markets speak, they talk about market fundamentals. And usually you're referring to the, you know, the very raw production supply production and demand for consumption. And we sort of talked around that a bit, but those big pieces are still still there. That's eventually what the market will come back to. So we still have capacity to produce these grains. Some of the supply costs have absolutely changed, like when you look at fuel and fertilizer. So we may not go back to where we were even 2 or 3 years ago, just because the cost structures have changed. But I do think that as the world works through all of these disruptions that we've experienced, we will settle back into some sort of normal, more calm period, probably that won't be as high price.
Derek Brewin:Yeah. I think you're right. I think we have responded to these high price and we did this in 2008 and 7, 8, 9 prices really climbed up and farmers produced a lot more. And we had record crops in 13, 14, 15 after the fact. So after we invest in better seeds and farmers get much more precise in some of their fertilizer management, which our understanding of that payoff to understanding that better is getting more and more. So again, good research at the University of Manitoba doing some of that. And I think that that you're right. I think we can respond the normal pattern over the last 60 years has been to respond to those higher prices with a lot of production. I expect we will get that too. And the other thing that, you know, I think that we haven't talked about on the demand side, the demand is shifting around. And if demand starts to, if demand starts to decrease the demand for animals, which, you know, there was, when we had the paleo low carb diets, there's this big demand for livestock. If it goes the other way, and we stopped eating... less animals, those animals, some of them are eating 3 pounds of grain for every one pound of food that they're making. That's, that's another big source of supply, which is really a decrease in the demand. And we don't know those customers too well. We don't know that individual piling up that looks like world demand. That's shifting around a lot too.
David Simonot:Yes, all very interesting. And I think the one, what you just said, Derek is just, it's it underlines how much people, the market, but really it's people and businesses, and so on, respond to changing situation, changing prices and changing productive capability. And when we have an extreme price level, we are freshly reminded. That people can respond quite strongly, often in ways that we didn't even think of either to produce more, to substitute into some other product or to consume less like it's really very interesting how strongly the response makes itself known in these extreme scenarios.
Derek Brewin:Yeah, and 1 thing that, you know some of the guys here at the university in our department were looking at the response of individual consumers within Canada to respond to changes in prices in the supply managed goods. But it was... it was really... they really did identify how more elastic it's like. How much they respond to price. The very low wage earners are, and it's even worse for, you know, community like right now, we're consuming most of our grains and oil seeds in highly processed form. It's a small part of that big canola price and wheat price that we are talking about very small part of your grocery budget. Tiny, the amount of barley and beer, I think roll rounds down to zero. I think your entire calorie supply is coming from bags of wheat and pulses. It's a huge difference in terms of your stability of your supplies. Those price spikes mean a lot different things to some of the poorest people in the world. The one part of that, though, that there's a little bit of positive stuff. Again, I know that Alphonse at well worked on some of this was that most of the world's subsistence farmers, that they make up a big portion of the world poor, they're also farmers. So when the price of their commodity has spiked up and they have any surplus, they're actually wealthier. When we worry about them, if they're farming and those price hikes happen, and they still produce a crop, they're actually sometimes better off. So, thank you for your time, everyone I think we'll call it there. Thank you very much for coming in today Dave.
David Simonot:Thank you.
:I think we can call that done. Thank you. Bye everybody.