Cereals Grains Market Outlook
From the perspective of a seasoned independent Canadian grain market analyst, this is a comprehensive review and price forecast for wheat, corn, barley, and oats in 2023.
The outlook for Canadian cereal grains in 2023 is lower. Bearish factors include cyclical dynamics, spillover pressure from outside markets, demand threats, and lower-priced competing global supplies. Technical chart signals affirm the fundamentally weak outlook.
The purpose of this research series is to is to pull together all the factors that drive land use decisions in agriculture currently. Often, the analytical process of Climate Action in Food Systems includes the financial implications of government and market-backed ecological incentives.
But today the approach is a more traditional return to market analysis of the main cereal grain rotational alternatives: corn, wheat, barley and oats. The goal is to understand the relative price dynamics facing producers in 2023, and changes ahead in relative and absolute values within the cereal grains market complex.
First, some context: These four cereal crops aren’t profitable to produce in all parts of the Canadian Prairies, but producers can choose from at least two of them everywhere. In some regions, all four are viable agronomically. The decision boils down to which one offers the highest return on investment (ROI). In the language of farm business economics, this makes them ‘rotational substitutes’, causing their prices to move in tandem, in the process of competing for acres.
The Biggest Bubble Is Wheat
At current prices for 2023-crop cereals, spring wheat is the stand-out winner everywhere in terms of relative profitability, compared to corn, barley, and oats. For this reason, new-crop prices can be expected to drop in the weeks and months ahead.
The same as was discussed last week in world markets for yellow peas and red lentils, Canadian spring wheat is on an island of high price these days, with new-crop Australian supplies the main competition. Concerns about movement of Black Sea wheat out of the grain corridor are ongoing, but the experience of the past year suggests exporters in the region now possess a degree of logistical and political competency.
The heightened competitive landscape in grain handling is fueling the strong pace of west coast exports. There is a big crop to handle and new assets to utilize, which has supported the country basis, and shrunk pipeline margins to historically low levels.
Grain handling margins at or below costs represents a disincentive for exporters to make new sales. Therefore, current 22/23 forecasts are likely above how much wheat ends up being exported, which will increase ending stocks and loosen the basis going forward.
Corn’s Connections to Cereal Grains
The wheat outlook becomes even more bearish in light of a possible sell-off in corn futures. Due primarily to the big crop coming out of Brazil, and demand concerns related to a global recession, corn market fundamentals are bearish. The technical picture is as well, with the back end of a head-and-shoulders formation evident on the weekly chart.
Especially during times of market turbulence and uncertainty, commodity futures tend to track one another. This is partly due to the role of the speculative investors, who move money in and out of different sectors according to similar indicators. In the basket of major commodity futures markets, i.e. energies, metals, currencies, etc., a bunch have sold off sharply recently, and the rest are also showing technical topping signs.
Recent price action in less liquid grain markets reveals further warning signs for corn. Feed barley markets are falling in western Canada (more on that below), and cash market moves tend to precede futures. Cheaper feed barley will also steal some cash corn demand locally.
The mega sell-off in oats is another bearish signal for the corn market. There’s an old trading adage that ‘the oats knows where the corn’s going to go.’ It makes sense intuitively that commercial money would exit the less liquid markets before strong sell signals appear in more actively-traded corn futures.
It is often found, in the science of market analysis, that the best information about future direction comes through more in the spreads than in the absolute prices themselves. As noted above, corn is at a premium to some of its traditional substitutes, that there is no longer a compelling reason for. In addition, futures are inverted, valuing corn delivered immediately more than corn for delivery later in 2023. In a sense, backwardation is a forecast for a downtrend in and of itself.
U.S. basis levels on corn are hard to read these days because the region in drought is also the center of domestic processing. Basis spreads have had to drive eastern U.S. corn supplies towards the plants in the west, versus the otherwise export-focused basis pattern. Fears remain about ongoing shortfalls in local yields around these plants heading into 2023 and that is arguably the only bullish factor for corn.
Old-crop corn export sales are slow, as the U.S. is a high-priced origin currently. Current cash buying is to fulfill existing sales, with little in the way of new business getting put on the books. If the carryout forecast for U.S. corn moves higher in future trade and USDA estimates, and prices align across geographies, that would spur a pickup in new export sales but for now the North American corn trade remains focused on domestic business.
Quiet, Flat Oats Markets Ahead
Oats prices have been in bear market mode since harvest 2022, following a major rebound in North American supplies. Demand for oats is strong, but the growth in consumption (from the gluten-free category and oat milk) isn’t enough to work down Canadian physical stocks in 2023 to any bullish level.
From the lows of around $4/bu last harvest, oats popped up above $5/bu briefly in December, and have since ground lower. Farm inventories are still ample, and will need to be sold before the summer. Upside is limited because the market broadly knows this.
The astounding dropoff in market prices since early summer 2022 is making for a great deal of variability and confusion in cash markets, and risk. In some cases, oats that were contracted before harvest are worth more than double oats that are currently uncontracted. Oats that were desiccated prior to harvest can’t find a home at all.
In 2023 and future years, there will continue to be a discount for desiccated oats. All but a couple Canadian and international buyers have banned the practice in their contracts. Oats producers are switching back to swathing oats.
Barley Next to Tumble
Barley prices sunk last week on commercial selling and a weakening of the overall corn complex. Canadian supplies rebounded sharply in 2022/23, and exports have as well, but the trade faces the same challenge with barley (as with wheat and pulse crops) to compete in world markets.
Barley is a direct competitor with corn in Prairie feed rations making it highly susceptible to spillover pressure from lower U.S. values. Corn has been railed into the Lethbridge market this year in greater amounts than what the market and analysts are currently factoring in, according to trade sources, which creates a risk of domestic feeding estimates not being met, and higher 22/23 ending stocks.
Exports of barley are on track to meet current estimates as of January, but will run into more competition from Australian supplies in the months ahead. Chinese demand is the main unknown. The Canadian dollar is the lone possible bullish influence.
Summary and Key Take-Away
The outlook for cereal grains in 2023 is bearish on balance, but there are always also a few bullish factors to watch. First is the ever-present possibility of a weather wreck, and these are more common occurrences now with the effects of climate change, than they were just 5-10 years ago. Second are currency markets, which will continue to be more volatile given global economic uncertainty and tense trade relations.
Canadian grain exporters are being extra-aggressive off the west coast in order to keep all the new handling facilities turning over. This lends an element of urgency to the basis, even though there’s no margin in it.
After the devastating buy-out scenario of 2021, farmers went into the harvest of 2022 relatively undersold. Then yields came in above expectations, and prices fell. This understandably creates false hope for a post-harvest market recovery, which in turn fuels continued slow farmer selling, missed opportunities, and a backed-up pipeline heading into the upcoming growing season.
This research publication exists, in part, to unearth and quantify the unpriced negative environmental externalities in conventional cereal and oilseed crop production. The goal is to prepare readers to adjust in the face of new capital finance headwinds coming at agriculture from institutions across society.
It is worth considering the possibility that 2023 is the last year that simple relative returns from the various crops in a farm’s rotational mix will be the primary driver of planted acres, as is assumed in the writing of this report. Ecological payments are here, they are multiplying, and they are significant. Expect tiered pricing and de-commodification trends to continue into the foreseeable future.