Grain prices drop amid concerns about China’s economy

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It's harvest time at Leo Meyer's farm near Peace River, Alta., which means several weeks of 12-hour days trying to get more than 13,000 acres of wheat, canola and other grains out of the field before the damaging frosts of September hit.

But he has China on his mind.

Doubts about the strength of the economic superpower have sent prices tumbling for grains and other commodities, capping a season marked by a Western Canadian drought that has slashed yields and a persistently low dollar that has driven up the price of farm equipment and fertilizer.

Amid large global crops, prices for most grains in Chicago and Minneapolis have fallen sharply in the past 12 months, a decline that was hastened by the recent plunge in prices for commodities and stocks on markets around the world.

"By far the biggest concern we have is with the global economy. To me, that's the biggest issue there is right now," Mr. Meyer said by phone. "It doesn't matter what yield we have if we can't sell it for a reasonable price."

The Britain-based International Grains Council has dampened hopes of a price rebound with a forecast that global grain inventories will swell to the largest in 28 years.

Tractor maker Deere & Co. recently underscored the weakness in farming as it posted a 24-per-cent quarterly sales drop in its agriculture division and slashed its outlook for the full year. Moline, Ill.-based Deere has laid off hundreds of workers at its U.S. factories this year.

U.S. farm incomes will fall by 36 per cent this year, the U.S. Department of Agriculture forecast.

"The uncertainty about global markets and geopolitical issues, I think, really reflect right back to the farm because many of our products are export-based. Can our customers pay?" Mr. Meyer said.

This season, Mr. Meyer fared better than many of his Western Canadian counterparts. He enjoyed timely rainfall in his part of Alberta and was spared the dry conditions that caused the province's expected wheat harvest to fall by 24 per cent. The drought also hit much of Saskatchewan, where wheat volumes are expected to fall by 21 per cent, Statistics Canada said.

The sting of a smaller harvest is often offset by higher prices. But Canada's grain crop is a small share of the world market, and large harvests elsewhere are keeping prices low, said Aaron Goertzen, an economist with Bank of Montreal in Toronto.

"What we're seeing this year again is pretty low crop prices. It's a negative scenario for Canada," Mr. Goertzen said in an interview. "We're experiencing lower yields and lower production, but solid production elsewhere is keeping prices down, so you're getting sort of a double hit to farm incomes."

Canada is the world's biggest canola grower, but global prices for the oilseed have been dampened by large crops of soybean, a substitute.

Major investment funds are selling commodities amid fears of declining global demand and to free up cash for redemptions, said Arlan Suderman, a market analyst for Water Street Solutions in Wichita, Kan.

"There's worries the global economy is tumbling and if you've got a poor economy you've got less demand for commodities. That's causing the big investment funds to sell," Mr. Suderman said. "China is a huge buyer of U.S. commodities. And as China's economy goes, so goes East Asia. That whole region is a big buyer of U.S. agricultural commodities. It really sets the tone. Traders pay a lot of attention to what's happening in China."

Mr. Suderman cautioned much of the sell-off in grains is overdone, and more about perception than reality.

He pointed to recent Chinese trade data that showed the country increased its purchases of agricultural commodities in July. "Food-based commodities probably have the best fundamentals, but the big funds paint a broad stroke and they don't understand that difference and they sell them all," Mr. Suderman said.

BMO's Mr. Goertzen said the weakness in the Canadian dollar could offset much of the drop in yields and prices and provide a boost to Canadian growers, who export 80 per cent of their crops.

"For a lot of these crops that are priced in U.S. dollars, such as wheat, you're going to get a lot more Canadian dollars in exchange this year," he said. "From a farmer's perspective, that big export orientation and the lower Canadian dollar are going to be a bit of a windfall and help offset some of the other troubles."

Mr. Meyer isn't so sure. He has seen prices rise for fertilizer, equipment and other goods, which are imported and priced in U.S. dollars.