For farmers, it might seem that crop prices are all that’s really important.
And for many farmers, that’s the basic template they use: when crop values move higher, that’s the time they might sell a little or a lot, depending on the size of the move.
But Matthew Pot maintains a different perspective. Make no mistake, crop prices will always be a key factor in producer marketing decisions, but Pot – the author of Grain Perspectives, a daily market commentary focusing on the economic conditions affecting grain prices in Ontario – contends that are other factors farmers should be keeping tabs on as well.
Speaking at the Southwest Agricultural Conference in Ridgetown, ON earlier this week, Pot noted that simple changes in basis levels can oftentimes put more money into farmers’ pockets than rising futures prices alone. Those changes in basis levels typically reflect changes in currency values – which are in turn impacted by a wide variety of background economic forces.
To that end, Pot said the rate of inflation bears close monitoring. Ideally, the Bank of Canada likes to maintain inflation at a rate of between 1% and 3%, a level that typically results when economic productivity and consumer demand are roughly in balance.
To help maintain that balance, Pot said interest rates are used as a controlling mechanism. For example, the bank can help to stimulate consumer demand by lowering interest rates, providing an incentive for people to borrow and spend more. Similarly, it can help to rein in consumer spending by raising interest rates and making it more expensive to borrow and spend.
When interest rates rise – or if they are expected to rise – that often helps to push the value of the Canadian dollar higher, which in turn erodes local basis levels.
The Bank of Canada raised interest rates twice in 2017, and at this point Pot said the Canadian dollar market doesn’t appear to be pricing in either an interest rate increase or decrease in the immediate term.
Source : Syngenta