The Market for Rye
The economics of cropping rye are unique, and improving thanks to new higher-yielding hybrids, tolerance to adverse soil conditions, and cover cropping incentives.
A core thesis of this research series is that in the future, the grain trade won’t have as much control over future supplies of different crops, as new revenue streams for alternative land management practices interfere with price signals to farmers. The cover crop market for rye seed was one of the first new sectors to exert a fresh impact on the grain’s global supply/demand balance.
In recent decades, the U.S. Conservation Reserve Program (CRP) has been providing incentives to ‘set aside’ marginal farmland, i.e. take it out of cash cropping, and plant a ‘cover’ to prevent erosion. The amount of government support for this practice has been on the rise in recent years.
Unlike intercropping, there’s no cash crop harvested in this version of cover cropping. Fall rye planted in the U.S. is most often plowed under the following spring.
As a result, the projected grain yield doesn’t matter to the farmers buying rye to plant a cover crop. Demand for rye seed is driven by the number of acres that U.S. farmers can be paid to plant in between their other cash-yielding crops.
The quality metric for cover crop rye is therefore seed germination, and almost all of the buying and shipping takes place in the summer months ahead of fall planting.
After that’s done, traditional buyers take over, and market specifications shift to milling and distilling attributes.
The upshot here is that the rye market has segmented to accommodate for new demand and outside payment influences. It’s an informative case study of what is coming in the future in other markets for products sold off of farmland.
SIDEBAR ON GRAIN MARKETING STRUCTURES
In western Canada where much of the rye seed is grown, fall planting decisions are made differently than for spring-seeded crops. Farmers anticipate the price a year in the future of competing crop options (oats, barley, corn and wheat) and compare projected returns, based on the current contract prices for rye.
Mainstream commodity crops - corn, soybeans, wheat and canola - trade against futures on a basis, the net of which becomes an ever-changing cash market value that, when fixed, determines revenue for a farmer seller. Specialty crops like rye, as well as some legumes and oilseeds like flax and sunflowers, are sometimes marketed under production contracts that share risk between buyers and sellers.
Unlike with futures-traded crops, there is no hedging mechanism available for specialty crops, begetting a different suite of contract terms in production contracts. The ‘Act of God’ clause defeats the farmer’s delivery commitment in the event of adverse weather conditions, allowing for a portion of expected production to be pre-priced with no risk.
The topic of price risk management in agriculture is sorely in need of more analysis and big-picture thought leadership, such as this recent piece by Niall Haughey. As biodiversity in farming expands, the absence of hedging in non-commodity markets by definition becomes a more predominant issue for production and processing businesses.
Production contracts are great for helping famers anticipate cash flow, and for grain buyers to track the field locations and origin story of their purchases. Soon it will be possible to feed the field records directly from farm equipment into the software that companies use to track purchases - making that data (biodiversity scores, for example) available to parties in positions to assess premiums and discounts.
Back to the Rye Market…
In response to growing awareness of the importance of keeping living roots on soils to prevent erosion and feed soil biology, new subsidies for cover cropping are popping up everywhere. Fall rye is one of the more popular planting options because it is relatively inexpensive compared to forage seed and it grows well in marginal soils.
Commodity markets experienced supply shortages and demand disruptions throughout 2021-2022, leading to a spike in prices. Canola futures shown below, for example, doubled from $600-$1200/t between 2021-2022, before falling back.
Source: Barchart.com
Specialty markets followed commodities in most cases, vying for acres. In western Canada, canola returns influence planting decisions in almost all other markets, and its dominance in crop rotations continues.
On a percentage basis, rye is finding stronger and more stable new consumptive demand than any other mainstream crop option, with the possible exception of biodiesel feedstock (soybean and canola oil). Canada has lost some rye export sales due to the shortage of production and excess supply, but that hasn’t weighed on the market much because underlying demand is still greater than local supplies, and growing.
This type of outward shift in the demand curve necessitates a higher equilibrium price. Today, in western Canada, that price is around $8/bu, which is about double the normal average trading range for cereal rye grain in past decades.
Commodity crop prices and other specialty crops crashed last spring on a global supply recovery and return to historically normal demand patterns. Yet rye, as well as durum wheat price patterns have divorced from related grain markets, because of their specific supply and demand structures, influences, and elasticities.
At a $6/bu premium over spring wheat, durum wheat feels like it has effectively priced in the devastating yield outcome caused by the drought in Saskatchewan, and is encouraging demand to shift. There is a small degree of substitutability between spring wheat and durum, and between Canadian-origin and durum from emerging suppliers like Tunisia and Mexico.
$8/bu rye feels like a stable equilibrium price level too, as evidenced by the fact that as we head into the 2023 harvest and the fall planting decision-making window, there are 5-6 companies all offering purchase contracts to farmers at that level for fall 2024 delivery. However, it must also be noted that the rye market is relatively illiquid and small compared to other North American crops, and hence is more prone to volatility.