June 2016

June 16 – Forces of Nature

On a winter day 50 years ago, Edward Lorenz, SM ‘43, ScD ‘48, a mild-mannered meteorology professor at MIT, entered some numbers into a computer program simulating weather patterns and then left his office to get a cup of coffee while the machine ran. When he returned, he noticed a result that would change the course of science.

The computer model was based on 12 variables, representing things like temperature and wind speed, whose values could be depicted on graphs as lines rising and falling over time. On this day, Lorenz was repeating a simulation he’d run earlier—but he had rounded off one variable from .506127 to .506. To his surprise, that tiny alteration drastically transformed the whole pattern his program produced, over two months of simulated weather.
The unexpected result led Lorenz to a powerful insight about the way nature works: small changes can have large consequences. The idea came to be known as the “butterfly effect” after Lorenz suggested that the flap of a butterfly’s wings might ultimately cause a tornado. And the butterfly effect, also known as “sensitive dependence on initial conditions,” has a profound corollary: forecasting the future can be nearly impossible.

It’s almost June, the new crop is in the ground, and as usual, there are some things we are pretty sure about and many more that we do not know.   Here is my take on a few of them:

“Our Butterfly”  –  The Indian sub-continent.    For the last couple of years this market has been about as subtle as Godzilla looking for a sushi restaurant in  Tokyo.   They have shown us that under the right circumstances this market can consume everything the world produces at great rates of return for sellers and encouraging a significant increase in export capacity.   The mystery has always been their ability to substitute and work within the larger global food production network to meet their needs.   Subtle changes in the market demands can have profound changes here in Canada.    India needs at least 22 million MT of pulses per year, but can consume up to 25 Million Mt.   Those 3 million Mt are determined by how much the poorest people will eat this year which is not correlated to any of our supply and demand calculations.   They currently lowered their own pulse production forecast from 17.33 M Mt 17.06 M Mt.   This does not immediately mean Canada can line up 10 more vessels of pulses at top dollar in November, but it might.   Right now, a million mt of 2016 production is already sold which is allows importers to wait and see.   Going forward, I see Canada’s big shippers moving closer to market saturation.   This means, large export companies are now so intimately connected to Indian demand they will aggressively compete to fulfill any market shortages to maintain market share.   I think this will limit the opportunity to repeat some of the atmospheric prices we have seen in the recent past.   If the Indian markets saturates and our capacity remains, it could get messy.

North American Acres – Lots of potential.   Combined output in Canada and the United States are setting records for peas, lentils, total pulse production as well as the available supply of pulses.   This year go big or go home.   If you are going to be small, then you better be smart.     What makes me uncomfortable is the investment in pulse acres and production capacity dependent on essentially one market.   China can play a role at times, but without India, our system falls apart.   We see this with red lentil grower bids varying up to 22 percent in a given week depending on the demand coming from India.

Weather – OK for now, but the usual worries of weather anomalies are providing enough of an antidote to large acres.    With zero carryover, Prairie weather over the next 90 days will help set the initial tone for 2017.   However, the strength of the Indian monsoon in late October will be the major determinant of future prices.

Logistics – Their loss is our gain.   Railroads and carriers are getting crushed.  Hyundai filed for bankruptcy at the end of May.   Other carriers are consolodating and trying to cut costs.    It does mean if we can sell it, we should be able to ship it in a timely way.

Wrap up – September though November will be big and crazy enough to generate some market momentum.   Pipelines will be empty and everyone will be motivated to fill them.    The last half of November has the potential to become anxiety ridden as early shipments arrive to destination and growers are ready to deliver more.   Everything will depend on the colour of our butterfly.