A confluence of global events combined with the predictabilities of the 89-Year Drought Cycle are the key factors behind Ontario’s record high rate according to Farms.com’s Chief Commodity Strategist, Moe Agostino.
By Andrew Joseph, Farms.com; Image via www.pixabay.com
If you are a corn producer in Ontario, then Monday, April 18, 2022, was a good day. A very good day.
For the first time ever, corn has crossed the $10 per bushel threshold in Ontario.
It has surged to this highest ever level owing to strong demand aligned against a tighter global balance sheet and the ever-present global supply chain issues created by the pandemic.
The rise in corn futures is driven by multiple factors affecting the market, but it all boils down to the belief that supply in 2021 will be unable to meet demand. End users have started to worry about securing supplies.
Maurizio (Moe) Agostino, Chief Commodity Strategist for Farms.com Risk Management explains why the big picture outlook from 400 years ago plays a role in how farmers should plan today and moving forward.
"It all starts with the 89-year-drought cycle, and everything else just adds more fuel to the fire," he stated. "It’s a six-year cycle and 2022 is the third year and Mother Nature will not allow the world to over produce and demand will continue to outpace supply. It is expected to peak in 2025 with a 70% chance."
The Cycle goes back to data collected just before the 1800s by American farmer Samuel Benner (1832-1913) which he used to determine the impact of the dry/wet cycle of weather, postulating what its impact would be through the year 2000.
Dr. Elwynn Taylor, climatologist and agriculture meteorologist with Iowa State University in Ames, Iowa picked up on that research—the Benner Cycle aka the 89-Year Drought Cycle—and was shown by him to be accurate +/- to one year.
While an 89-year cycle spread out over 220+ years is not irrefutable evidence of the cycle, Agostino begs to disagree.
“People need to pay attention to the 89-Year Drought Cycle. Mother Nature is not going to allow the globe to supply. And everything I just mentioned—that’s all just fuel to the fire.”
Agostino said that he has been expecting the drought since 2019. “I’ve been warning farmers about the triple digit (Fahrenheit) temperatures. And there in 2021—a heat dome that no one said was coming except me— in the middle of June, 119F (48.3C) temps destroyed half of western Canadian crops.
“January in Argentina, they were hit with 113F (45C) temperatures—they’ve never seen this before. Australia 50C (122F). And now Brazil is facing extreme drying out of its soil.
“They say it’s very rare,” Agostino noted. “But guess what? It’s part of the 89-Year Drought Cycle.
"There’s nothing that you and I can do about it. It’s just Mother Nature.”
“The last high was seen in 2012 when we had a drought,” said Agostino. “But, in 2012, the price never reached $10 flat because the Canadian dollar was trading higher then. The basis then was under futures, while now its over futures. The year 2012 was a short year than came the long tail but this cycle will create multiple years of a short crop with a long tail starting in 2026.
Not just an Ontario effect, the United States of America also saw corn futures rise to US$8+ per bushel.
“For a lot of regions in the US, especially the mid-West, that is also a new record high for this time of the year," he added.
Although US President Joe Biden recently announced that his administration wants to reduce the burden of high crude oil prices by instigating more ethanol usage, Agostino wasn’t buying that as a reason for these high corn prices.
“The entire trade is getting it wrong,” he stated.
“This rally started in 2019 with the whole Trump Phase 1 trade deal with China, which worked to help increase exports. And it did that. Since Biden got into office, we haven’t met those Phase 1 trade commitments, and they have been struggling to get China to catch up, so to speak, and maybe go to a Phase 2.”
And then Covid-19 hit in 2020 with global economies essentially shutting down for months on end, the world has since been playing catch-up.
“We all found out that when you try and restart a global trillion-dollar economy, it doesn’t go so well thanks to multiple Covid-related supply chain disruptions from labour shortages, to not enough truckers, etc… and supply that is trying to meet soaring demand. Loss production means you never catch up and, in the process, it created inflation,” Agostino stated.
Agostino said that governments initially believed these negative factors were transient, but were wrong as it has lasted much longer than expected. Now global governments are trying to increase interest rates to slow the rise of inflation.
“They should have started this last year rather than this year,” Agostino related, “and now I’m afraid they are going to do too much and slow down the economy enough where we may enter a recession.”
The first shock to the system was Covid and all of its ancillary issues, but now we are faced with a second body blow—high crude oil prices, which if they go much higher from an EU embargo on Russian supplies will destroy discretionary income.
“Some think that we will be more resilient to these shocks, but only in time will we all know,” said Agostino. “Just like sanctions against Russia, higher interest rates take time to work."
He continued: “North America is concerned more about inflation versus growth, and is raising interest rates higher than we thought. Meanwhile the EU and Asan countries like China are leaving interest rates alone because they are worried more about growth than inflation.”
He said that when you add this with the war in Ukraine and China going back into another lockdown—as of this past weekend, 40% of China is in complete lockdown—it will create more ripples within the supply chain disruption, including inflation. “All of this is going to last a lot longer than you think,” he opined.
Back to Commodities - Why are commodity prices soaring? Agostino pointed a finger at the hedge fund managers who sought to buy commodities as a hedge against inflation, and April 18, 2022, was a classic case of that.
“But what’s making it all worse, is that because of the war in Ukraine, the end-users are now worried about securing supplies and are starting to panic-buy, and add this to the fund flow—Morgan Stanley suggested that if funds add one more percent of commodities to their total assets, the global commodities prices could soar by an additional 40% from where they are today.”
And then the most important piece of advice from Agostino: “Farmers need to start to change the way they do things, they aren’t going to be farming in the same way in the next two to four years.”
This dire warning is relative to the high price of inputs such as fertilizer. He noted that if farmers expect that the 2022 high price is simply going to disappear, they will be in trouble.
“While the price of corn rises, all it’s doing is offsetting the high fertilizer prices. You’ve got to be able to book the prices the inputs—the chemicals, the seed, fertilizer—sooner rather than later, because if you can save some money on the long-term, I can make more money.
“My slogan for success, is to store and ignore,” Agostino explained. “Even now, it’s not too late. Lock in the input prices. Farmers need to bite the bullet on inouts prepay and take delivery, take control of their inputs and have more on-farm fertilizer storage.
“I know farmers aren’t used to doing that,” summed up Agostino, “but they need to take control.”
Agostino is with our Farms.com Risk Management group that offers a subscription-based risk management newsletter service to farmers and agribusinesses across North America. To stay up-to-date on this and other insightful topics, sign up for a FREE eight-week trial to the Farms.com Risk Management newsletter, visit: https://riskmanagement.farms.com/.