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Executive Summary

World Ag Stage:

March is the start of all things production. This year will be especially sensitive to any production issues around the world. The market is set up to be very explosive during the growing seasons.

Financial World:

Quite simply, the whole world is out of control when it comes to printing money. It would seem that the central banks are in some sort of “bigger better” competition. At some point the piper will have to be paid, which means economic woes. It could be Inflation, deflation or anything in between. The modern world has never seen this before. It happened in Rome once, but that was a long time ago, plus twentieth century is SO much smarter. 😊

In reality, as the world governments continues to create currency out of thin air it would be expected that money will always flow to point of greatest returns. And for farmers this means price volatility. The days of old where prices moved a few pennies per bushel are gone. Those pennies have been replaced by dollars and when the blue line crosses the red than watch out cause the market will swing like the 1970’s. The market will move from well below your cost of production to astronomical levels in a matter of months. The year 2021 might just be a warm up.

Risk To Reward Management:

The number one thing anyone can do is to recognize this volatility and stop horsing around. Things have suddenly gotten real. It’s time to understand your profitability and capitalize on the knowns.


NEW Recommendations

Old Crop

Pretty much everyone is all caught up in their sales. There is no rush to make additional sales if you have been following along.

New Crop

Again, take a look at what crops have the highest potential for a drop in price. I would say that barley and yellow peas and maybe oats have the highest potential for lower fall prices. In other words be more aggressive than normal. It doesn’t mean lock in the whole works, but you should do something even if it’s only 5% of production.


Weather

It looks like a La Nina is in the works for 2021, not as strong as 2011 but stronger than 2012. La Nina years seem to correlate with higher wheat prices.


What does this mean?

USA corn and soybean belt could see a tough harvest. Parts of wheat area could see dry growing season.

Canada could have a tough harvest as precipitation is expected to be above normal.

Bullish or Bearish.

The current market set up is decidedly bullish, especially with oilseeds. What the world really needs is bumper crop to push these prices back down to 2019 levels and that’s a pipe dream. However, both canola and barley should enjoy an increase in production and these current astronomical prices will probably not be there in the fall of 2021. There should be some excellent pricing opportunities during the growing season, it would be wise have the ability to price out a load or two during a weather pandemic. Of course, everyone remembers $9 wheat in 2011 and in 2012, both La Nina years.

Stacking the deck.

If this is correct than a wise farmer would grow crops that have minimal grade risk and are easy to harvest. The potential for grade problems is elevated with poor harvest weather is a real threat. Just like in 2019, the falling number and moisture could become huge factors in 2021.


Canola

World Stage:

World production is down and ending stocks are also expected to decrease this year. In 2019 ending stocks peaked out at 9.6 MMT and in 2021 they are expected to be only 5.1 MMT. It will take a significant production increase worldwide to increase 2022 ending stocks where the market is comfortable. This will be extremely difficult because in 2018 the EU banned neonicotinoids – basically seed treatments, which is why pre 2018 the EU production was over 20 MMT and has since dropped to 16 MMT, a deficit on the world scale of things. That would be like Canada losing ¼ of the canola crop. This deficit must be made up by other countries as Canada is pretty much maxed out on canola production. Overall, this a bullish story for Canada and canola.

Apart from just canola the overall global oilseed complex is tight. There is not a lot of room for error. Basically 2021 had better be a bumper crop or these current high prices will be here for a little longer than expected.

Market Zoning and Timing:

Pre this year it was safe to say $440/mt was pretty much a price floor. Now in 2021 those days are over and market has fundamentally shifted, although, not a commodity super cycle shift of the golden ratio, but rather a new plateau within the current price cycle. Until the fundamentals change this new plateau will likely range between 550 and 650 on the futures. This is assuming the market and production behaves like it should for the next 2 years.


Risk To Reward Management:

· 2020

o At this particular point in time why is anyone holding on to old crop canola? If you are holding on to canola that is worth over 800/mt then the only thing to do now is sell.

· 2021

o The balance between booking too much and too little is an exceedingly difficult one. There needs to be 2 questions asked before booking. 1) Will I have enough grain to cover contracts? 2) What is the price potential in the fall? To answer the first question we must first look at what the price did in 2020 as this is a huge indicator of potential buyouts. If there is any kind of drought across the prairies the buyout potential is huge. This carries a very serious financial risk, one that most insurance companies won’t cover. All of a sudden a $100,000 buyout goes up to $400,000 which in some cases could be a death blow. There are ways to mitigate these kinds of potential disasters using certain financial instruments; however, these also have limitations.

The second factor that needs to be considered is the price potential in the fall. More so, how much could the price drop?

Knowns:

· Canola did not hit a new commodity super cycle. This is important because it will give canola a whole new trading range and the previous one is no longer as important. However, Canola did not enter a new trading plateau.

· Canola will most likely trade within the bounds of the 2008 super cycle range. Whether or not it trades in the upper range or lower range will depend on the supply and demand conditions. The lower range is between 440 and 550. The upper range is between 550 and 650.

· Canola can and will momentarily trade into the next super cycle zone, but only while the S&D allows such extremes.

· It may take a few years to correct the S&D equation, so prices have the potential to rally above 650 until the S&D is corrected.

· The elephant in the room is of course the monetary policy which could cause a super cycle much earlier than the expected 30 years which is supposed to happen around 2037ish.


Smart Contracting:

· 2020- Sell everything. There is a small possibility that the market could run up to $1000/mt but it probably more likely to drop down to 650.

· 2021- look for opportunities that make money. Since the case can be built that the range of canola for next year will be in the 550 to 650 range it would be wise to capitalize on the upper ranges. When the new crop futures gets close to 650 then it would be wise and prudent to sell a percentage. Nothing wrong with locking in 25% of canola at a $250/acre profit margin.


Current Trend and Looking Ahead:

· The market is setup for some serious excitement during the growing season. Any thought of drought or even a slight hiccup is going to drive this market crazy.

· Because of this fact it seems like a pretty safe bet to leave some production unpriced and take a wait and see approach.

· It goes without saying that China and the rest of our trading partners need to be watched very carefully. Remember it only take one idiot in Ottawa to say something stupid and the whole thing comes off the rails.


Moving Forward:

· The best thing to do right now is to take money off the table if you haven’t done so already.

· It is important to realize that the S&D is super tight and any issues with production could cause the market to jump $200/mt overnight.

· Don’t get caught by overbooking, because in this environment everything is expensive. Puts and Call are expensive, a good futures broker knows what I’m referring to.

Look at different insurance programs. This could be the year where big premiums have big rewards.


Canola - General Selling Thoughts

Charts and Graphs


Wheat

World Stage:

Wheat is like the Energizer bunny of Ag. Production just keeps going and going. It has steadily increased year over year for the last ten years and it doesn’t seem like production has plateaued yet. Basically, wheat can be grown all over the world and everyone is doing it. However, this year profitability may finally come into play. In the last 20 years or so the ratio between corn and wheat has been about 1.45 meaning that the wheat price normalizes at about 1.5 times more than corn. Currently, wheat and corn are basically on par at 1.07 times. In farmer talk, it means that there is more money in growing corn than wheat. Which translates into more corn acres and less wheat acres. Like Corn, soybeans are way more profitable than wheat.

One of the most important numbers in all this data is the ratio of ending stocks over production. If this ratio is getting larger it means that production is outstripping demand and ending stocks are growing. When ending stocks grow it means that overall supply is growing. Of the last ten years the previous three have been the highest at 39%. This is exactly why wheat prices have remained flat and low during the previous 3 years. Supply is ample.

Take a look at 2011-2014 when this ratio was below 30% and then look at the price. The wheat price from 2011-2014 was significantly higher. The Kansas wheat futures ranged around 8 dollars per bushel, a stark contrast of 2017-2021 where the futures price was closer to $4/bu. This ratio is a very important marketing factor.

By examining this chart there is something that needs to be addressed and that is China. Why, since 2018, has China been increasing their ending stocks to the degree that they have at least one year supply on hand. It pays to note that China is doing this with other commodities also. So why is this and what does it mean?


Market Zoning and Timing:

Long story short, a bumper crop is good for nothing. What we really need is to drop that ending stock ratio slightly like down to 34%. Then wheat is pretty much guaranteed to rally. With all that is going on in the commodity markets right now the 2021 wheat production is very critical. The market is charged for some volatility this summer. If history repeats itself and La Nina develops which should cause wheat production to drop significantly than expect a large price rally. 2021 wheat pricing is extremely weather dependent.


Risk To Reward Management:

· 2020

o Any wheat that needs to be moved before summer should be priced at these levels or at the very least a target of 25 cents higher than market.

o Summer could get exciting; any trigger event could cause wheat to spike up to get back in line with the soybean and corn markets.

· 2021

o Good pricing opportunities on CPS wheat, but not as good as futures only contracts done back in Dec-Jan. If no CPS is booked yet pay attention to any prices above $7.

o With all the horseplay and other “phytosanitary regulations” there is really no good opportunities with HRS at this particular point in time. However, with the volatility in the market be ready to grab a good price.

Knowns:

1. 2020 wheat production was a record. Ending stocks over production is very high.

2. La Nina could be forming. This weather is negative to wheat production.

3. China has been stock piling. How long will this last? This is positive or negative.

4. Wheat is undervalued compared to corn and soybeans. This always corrects.

Smart Contracting:

· 2020

o Targets. Just throw in targets for what you have and what you want. Elevators are pretty aggressive for good quality.

· 2021

o CPS look for opportunities that are greater than 7 and just book a safe percentage.

o HRS probably best to take a wait and see approach. Have some lofty targets in for a summer rally. Be quick like a fox.

Moving Forward:

Best thing that can be done right now is to be prepared for a La Nina Year. The setup is already in place. The market just needs a trigger.



Current Trend and Looking Ahead:


Barley

World Stage:

For the first time in about forever, Canada finally must look at the world barley situation. Back in the day when barley was in CWB purgatory it was basically a feed stock even though our barley is of the highest quality. It was the job of the feed lot industry to take that high quality barley and convert it to steaks. The communist CWB basically land locked all Canadian barley which is why many farmers once viewed barley as a necessary evil. That has all changed. The iron fisted board fell and has been replaced by the invisible hand. In the last few years the surge of elevator capacity has given barley a new life. For the first time, regular old Canadian barley has a new mainstream use. The barley export market is not going away anytime soon. It is in the elevators best interest to move as much product through their facility as possible. Elevators don’t care about the product, they care about turning inventory.


Market Zoning and Timing:

The question that needs to be asked is why barley rallied up so much and is there justification for a new price plateau? The main reason why Canadian barley rallied up so much was because of the elevator export program. This has resulted in a brand new S & D equation for Canadian barley and hence a new price plateau although it is probably not going to stick around this $6+ range. Because of this new demand the price should in theory range between 4.75 and 6 bucks depending on situation. It really means that going forward $5 FOB barley should be achievable on any given year.


Another interesting thing that has happened is the break down of traditional FOB barley spreads. Because the elevators operate on rail freight, which is much cheaper than truck freight, it means the price is no longer a function of Lethbridge, but rather a function of port. This is massive. The implications are huge and things are going to be disrupted.

Risk To Reward Management:

· 2020

o SELL IT NOW. The elevator prices are dropping, feedlots are covered for the nearby and BBQ season is just around the corner. Outside of weather the bulls are pretty well fed.

· 2021

o There should be a significant portion on barley sold to elevator already. Any price greater than 5 is a no brainer.

Knowns:

· A lot of barley will be grown this year. It could as high as 13 MMT.

· New crop sales have been very aggressive. Export program could be as high as 4 mmt? This year it is estimated at 3.3MMT.

· Canada ending stocks are virtually zero.

· China has a trade dispute with Australia. If resolved CAD bly will drop in price.

· Tight Corn S&D


Smart Contracting:

· 2020

o Sell it. Call Greg @ Insight Ag Marketing and sell it. 403-782-5488

2021

o Nothing wrong with being 40% sold when the prices are this high if you have priced correctly.

o If you haven’t priced anything yet use some target to get some sales on the books.

Current Trend and Looking Ahead:

Under normal circumstances the probability of new crop barley being lower in the fall than it is right now is pretty high. The amount of barley that will be grown is very large and export demand is only so much. Expect the S&D to start coming into alignment.


The Action Plan

The setup for this summer is one of volatile markets. There could be huge swings either direction. The whole financial complex is in a state of uncertainty. The whole political world is anything but certain. The weather pattern is setting up for a La Nina which historically has caused some production issues. At this particular point in time nobody has a clue how the next 6 months are going to play out. What is for certain is that somewhere at some time a farm will say “she’s dry”.

A few suggestions.

1. Be ready for market volatility. Have your pricing targets in place.

2. Don’t get oversold. Know what your maximum level of risk is. Write it down.

3. Have a backup plan.

a. What are you going to do if the crop fails?

b. What are you going to do if the market never rallies and just keeps falling?


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Disclaimer

Opinions expressed reflect personal judgment. Insight Ag Marketing ltd is not responsible for any actions taken because of these opinions.

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