October 2017

September 2017

Quickdraw predictions:

Laird 1 = 54 cents by November 10, Max price of 60 cents by January 2018

Laird 2 = 50 cents by November 10, Max price 54 cents by Spring 2018

Eston 1 = Will not break 42 cents this crop year

Reds = Reach 27 cents by March 19, 2018, Return to 22 cents before next harvest.

US Richleas = Surpass Canadian Laird 2 prices by Spring 2018

Canary = 26 cents by December, prices fade in 2018

Green Peas = Never break 9.50 during crop year

LA Dodgers win the World Series in 6 games

NE Patriots lose during the playoffs to Oakland in January 2018

Every Canadian Hockey team except Vancouver makes the playoffs.   One Canadian team loses in final.

AUGUST 2017

It is the evening of August 1 and I am struggling with something useful to say about the upcoming crop year.  The best I can do is confirm/repeat some observations that I believe will be true for the next six months.  Please read along with the following disclaimer taken in the form of funny t-shirts.   We may all require some humor as the week’s progress.

Trader: We do precision guess work based on unreliable data provided by 
those of questionable knowledge

I'm a commodity trader:  I solve problems you don't have in ways you can't understand.

and my favorite:  In my defense I was left unsupervised.

• We will have a short lentil crop, but it will not be a crop failure.  US and Canada will range between 8-18 bushel/acre.   The primary impact will make buying a very difficult endeavor for processors because the farmer will carefully shop around each lot before contracting.    It will cause the grower market to perpetually run 2-3 cents ahead of export bids.    
• Quality will be good, but be limited by colour.   Suntanned or browning lentils should be more of the norm this year.   We should be able to avoid stain, wrinkle, and splitting issues.   There should be worry by buyers about blending last years poorer product into the current crop.
• Major volume markets like ISC will not be present until much later in the fall.   It will make the market spottier and much more difficult to get in and out of.   
• Beware of the potential for a perfect price storm and return to S+D fundamentals early in the new year.   Diminished stocks in the pipeline, limited grower stocks in the bin combined with a potentially poorer production in competing countries should significantly be able to boost prices Jan – April 2018.
• Drought worry and limited carry out stocks will continue to propel prices through the fall of 2018.    Pulse crops were able to pull through this year because they were seeded into adequate subsoil moisture.   This may not be adequately replaced before the winter freeze.   It should make for an anxious spring.

Throughout August our focus will be to execute our production contracts and find a way to determine availability.   The early harvest will give us production opportunity for spot business based on what additional product producers are willing to let go.   Expect smaller quantities to be offered for shorter periods of time with more volatile pricing.   

Encouraging everyone to share production and pricing information as we stumble into a new year.

Looking forward to your communications.

Dave

BLOCK CHAINS, SMART CONTRACTS, AND THE FUTURE OF PULSE TRADING

Back in 2000, someone decided to let me have a hand at marketing a chickpea crop that had just topped one million acres for the first time.    I quickly discovered the established Mexican and USA trade was already using a completely different quality and calibration methodology than what we were trying to do at home.   Shake the sample 10 times this way, 5 times that way and figure out how much is over a certain screen size.   It seemed much more logical to drop 40 or 50 grains into a scale until it reached one ounce (US or Spanish? Maybe this was never going to be simple).   Why weren’t we making an empirical calculation like the Mexicans and the Americans?   “It’s all about the mystery!” I was told tongue in cheek by my peers.   For a long time, this type of answer has been acceptable for Canadian special crops marketers.   We had a lot of stuff and could dominate as suppliers in a growing trade.   That domination rode the rails of trust granted to Canadian shippers more than what had ever been truly earned.     

I think we can safely say the knife cleanly cuts both ways in buyers and sellers trusting each other.  We have matured as an industry over the last 20 years, but have foregone our innocence.   Any Canadian exporter who says he has not experienced hard lessons while naively navigating the global marketplace is lying.     Any Canadian exporter who has not actively fudged a bit to execute a shipment is lying.   As a result, these days it would be difficult to argue that a Canadian should automatically be granted the high ground in any trade dispute.

Times change (as they should.)  Buyers and sellers of specialty crops cannot rely on formal institutions to protect themselves from each other.   It is now time the industry turns its attention away from its emphasis on greater production to an emphasis on greater execution.   The trade has grown past current methods of contract management and used up our goodwill.    There is too much money moving to0 fast between too many hands with too many variables.   Many countries other than Canada are now competing for scarce buyers.   The Africans, Argentinians, and the Eastern Europeans to name a few are all becoming better producers and have the ability to sell cheaper.   In the future, the winner will be the one who is able to harness the trust gap and deliver certainty among its members.    Trust has always been the fundamental currency of commerce.   The country/group that can bridge this gap will separate itself from having to slug it out with price as its lowest common denominator.       Since current contracts are barely worth the paper they are printed on.   This is a massive opportunity.   But where to begin?

We need to forget the banks, forget about fancy apps, forget GAFTA, forget government agencies, in fact, forget all the institutions that we hoped would protect us from being on the wrong end of unscrupulous trades.   They won’t.   The trust gap needs to be rebuilt using decentralized databases and smart contracts in peer to peer networks.     Today, uncertainty can be lowered through technology alone.    Major advancements in cryptography and decentralized computer networking will change how we trust across borders without reliance on many of traditional mechanisms.       The new tools will be block chains and smart contracts.    It is beginning to happen now across the globe and we should be discussing and working toward it.    

For inspiration with these ideas.  Check out Nick Szabo @ www.unenumerated.blogspot.ca 

<Couple of definitions from WIKI>

A blockchain^[1][2][3] – originally block chain^[4][5] – is a distributed database that is used to maintain a continuously growing list of records, called blocks. Each block contains a timestamp and a link to a previous block.^[6] A blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. By design, blockchains are inherently resistant to modification of the data.

Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary. Smart contracts often emulate the logic of contractual clauses. Proponents of smart contracts claim that many kinds of contractual clauses may thus be made partially or fully self-executing, self-enforcing, or both. Smart contracts aim to provide security superior to traditional contract law and to reduce other transaction costs associated with contracting.

I can imagine the following:

Buyers and sellers belonging to the network are talking and exchanging information as we do now.  Taking inquiries, quoting prices, and discussing shipping positions.   When they are ready to finalize business, they enter a NEW VIRTUAL TRADING ARENA in which the performance of both the buyer and seller are be monitored and underwritten by insurance protocols and the contract they make is frozen on a large industry ledger.    They make a simple or complex contract in any way they choose.   However, that contract would remain intact until execution.   This smart contract is now part of the blockchain on a network of computers which becomes the basis of protection for both sides of the agreement.     In the future, either the buyer or seller could transfer their responsibility in the contract to another party in the network.    Simple contracts would allow traders could buy and sell it many times at a premium or discount until the product was finally shipped.   More complex contracts with more detailed quality constraints could also be handled the same way but would become less liquid.   The key would be every transaction and change of ownership would of this continually uploaded and confirmed across one long ledger until execution.   

At shipping, an independent surveyor automatically receives an inspection instruction containing all the parameters of the contract including a picture if necessary.   The Surveyors (SGS/Transloaders/etc) verify the quality and weights directly to the network which could draft the export documentation from the database.    Payment can automatically be programmed to follow according to the contract.  

With tools like blockchains and smart contracts, a global utopian pulse trading system is actually within our grasp.    The question is, are we truly ready to take full responsibility for our actions, or do we all still need a little bit of mystery?

Enjoy the summer.   Crop update in the August report.

Dgn 06/27/2017

Let’s just get this out of the way, the next few months have the potential to go in any direction.  Without India acting as a guiding star to chart our course, markets remain listless and apathetic.   Here is a future scenario to ponder until we know more.  

Where we are (Supply Side):   Growers bins are relatively empty and there is no virtually no pressure on them to try and force sales to generate cash or bin space.   Export markets are saddled with high-priced products, but those are slowly disappearing at significant losses and product is not being replaced in the pipeline.   Seeding has been difficult for many producers and production will not expand.  As a result, it will be difficult to have an oversupply situation for 2018.  These 3 points should converge in September with relatively strong growers holding less production in front of a diminished pipeline.   The stage is set (again) for a potential run on prices.   

What will happen (Demand Side):   Some people will think about what just happened in 2017,  see a similar situation developing and employ the old adage “once bitten, twice shy” or possibly “repeatedly bitten and now fearful for their life!”  You would expect the market to show some restraint before engaging in a similar pattern this fall.   It would make sense to collectively hold back bids and pace ourselves through 2018.   However, markets make people crazy.   Or, more likely, people are crazy all by themselves and markets give them the opportunity to play it out.   Either way, there is no rule that says that our decisions must logically flow to maintain an orderly distribution of product through the crop year.  It rarely happens.  Greed and fear.   Fear and greed.   Old as life itself.   No one wants to be left out.   The need to block competitors and secure the production necessary to keep our facilities running at full tilt will drive prices past where they should be.   Importers, looking at lowly stocked warehouses and fearful of them staying empty and will jump on board.  With prices starting so much lower than last year it will be hard to see the downside risk.   But it exists.   Yes, it exists.   

Dgn 05/30/2017

May 2017

“Let the first impulse pass. Wait for the second.”
– Baltasar Gracian

A common narrative around agricultural markets depicts a group of buyers relentlessly trying to beat down the market price of a given commodity while growers attempt to defiantly hold their ground.   In reality, no one really cares about the actual commodity price unless it falls below the cost of production and the cost of production is a number that is liberally interpreted.   The other reality is that not much happens in Canada during a down market and for all their pomp and flair (and newsletters) buyers have very little to do with setting the price.   We have just witnessed such an event with our old and new crop lentils.  Grower bids have sustained major corrections over the past 60 days as destination markets struggle to absorb high priced product.   Growers (en masse) failed to respond in a meaningful way even while watching their remaining inventory lose 30% of its value.   When buyers needed to restock they discovered prices needed recover 20% to secure new merchandise from the bin.

The table below suggests that growers will continue to dictate how the market will progress through 2018.   Carryout stocks are manageable, price bottoms have been tested and rejected by producers and current markets reflect the expectation the growing season to progress normally with bids remaining 2-10 cents below what growers are expecting for their 2017 lentil crop.    The good news is that the market has been re-set and the probability for severe downward corrections is very limited.   Timing is everything, but we are likely at the beginning of one of those coveted, slowly rising markets that actually profits everyone.

DGN 04/21/2017

April 2017 – New Crop Edition.   Traditionally in April, there is a lot of spirited debate on the projected acreage numbers for Canadian Special Crops.   This year is voicing more of a stunned silence from market participants when looking toward the 2017 production potential.     The hesitation is not surprising given the February collapse of the old crop markets and lingering uncertainty about import restrictions on several main import markets for lentils, peas, and canaryseeds.     The memory of quality problems at harvest for Canadian crops is also fresh in the minds of both growers and buyers alike.   Farmers are not likely to risk undervaluing their future crop while buyers have strong fears of overpaying for poor quality products that they may have trouble importing.   

My feeling is despite these polar points of view the market mostly has it right.    Acres for most crops will be down slightly due based on lower price expectations and the need for disease control in rotations.   There is ample moisture to get crops out of the ground and the probability is that yields are going to be better than 2016.   We can’t get a wreck at harvest 3 years in a row, can we?   

Last year we started out pricing similar to the numbers we are discussing today.   Grower bids for Reds in the mid 20’s, Lairds in the Mid 30’s.   If things generally stay the same this is where we should be in September.   With both farmers and importers taking a more wait and see approach there should be a lot of free agents looking to do business off the combine rather than worrying about delivering on production contracts.   This should balance nicely against the demands of buyers who will be willing to pay market prices for increased certainty in quality.    Canary is a bit of a dog today but fundamentally it’s hard to see the situation getting much worse.   A moderate increase in buyer participation should float the canary back up toward the mid 20’s through 2018.   

All of this depends on the weather, though I would argue to a lesser degree than history has revealed.    Seed varieties and production methods have shown a remarkable sophistication in their ability to harvest a decent crop in conditions that would have been a total disaster 1o years ago.     

Looking forward, expect markets to remain defensively priced with growers slow to participate until more clarity arrives in the special crops narrative.   By June 2017 the industry should be in a good position to move forward.   Dn2017

 During the last 30 days, the special crop market has swirled with so much change if you went on vacation during February they would not be recognizable on your return.   This indeed is the case for many participants.   With many markets shedding 20% or more of their original values it leaves many to wonder if this is an anomaly or an indication of things to come.    

As usual in special crops,  all market stories are India stories.    This is not news.   When the India’s demand arrives at Canadian ports its tide rises all boats.  Today it has retreated beyond the horizon with a lot of rhetoric that makes it feel to many of us like it will never come back.   

The tide analogy is a good one.   Like the sea, the market is impossible to hold back when it needs to go somewhere.   Humans can try to delay it or divert it, but eventually, they lose to its overarching power.   With today’s market retreating beyond what most people felt possible, every trader outside India is feeling the loss of this market.   The question is how long can Indian demand be held back.

My feeling is that the current situation will remain the status quo until mid-June.   The current circumstances allow the Indian stakeholders to benefit greatly by blocking imports and fostering uncertainty about the future.   High domestic prices due to drought have not benefited farmers or consumers.  North American exporters took full advantage, shipping substandard quality and hoarding at the port to artificially drive up prices when India was most vulnerable.    Indian farmers did not have a crop to benefit from the high prices,  consumers paid a larger percentage of their limited incomes, splitters struggled with high priced, low yielding inputs,  and politicians felt the full effect of the frustration.  

Canada once again struggled with a quality crop in 2016 and shipped this quality into the falling ebb of India’s demand.   It is not surprising that, given the opportunity, that Indian stakeholders would take full advantage to get out of high priced contracts and boost local prices to farmers while maintaining reasonable prices for consumers.   They get the added benefit of deflecting some of the pain felt in Indian over the past 2 years back to Canada.  

This is not the actions of long-term thinking and cannot last.   Fundamentally, the world is continuing to work with-in annual production.  This means there is virtually no carry over from year to year and leaves markets very susceptible to any production problems in any region.   It also means in the short term, negative market moves will be overdone by Canadians looking to minimize losses or capture any remaining market value.   As a result, The bottom is being found very quickly.   People will continue to eat, demand will flow back to Canada and prices will improve (though at a more cautious rate.)   Expect the fumigation block on exports to be resolved when the Indian market once again realizes that it will benefit from cheaper Canadian imports to fill its demand.    

Lentil acres are expected to be down in Canada and even with decent 2017 yields, it will be hard to massively overproduce.   The glory days may be gone for the moment, but I am confident Canadian lentils will continue to return to profitability.