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XXXVI - Grain Export Prospects: A Promising Outlook For Producers

Updated: Jan 16

As you know from our previous articles, we recently took a slight diversion from our development path by introducing an interim-phase to our trade-facilitation strategy. This was in response to the panic in global grain markets caused by the Russia-Ukraine war, now turning into a prolonged conflict on the world stage: not only disrupting Ukraine’s exports from last year’s harvest, but also its production capacity this coming year. As tragic as this war has been, with devastating consequences for Ukraine, it has presented Canada with grain export opportunities difficult to pass up.

The cornerstone of our strategy in opening new export channels was our new platform, Virtual Grain Mall, now under development scheduled to be introduced at the end of 2022. Without this promotional platform in place, we embarked on these interim trade-facilitation efforts with trepidation, if not serious reservations. The response, however, has been hugely encouraging. The main purpose of this article is to give our followers an early update in the hope of enticing them to participate in our efforts to capitalize on overseas export prospects outside the bulk domain.

Before getting into the crux of the matter, new export prospects, we thought it would be useful to provide some background on what we are trying to accomplish with our core mission, a paradigm-shift in overseas grain exports away from bulk-trades to direct-sales fulfilled in containers. We ask our core-followers to bear with us as some of this material will have been covered in previous articles; we will be following up with more information on new export prospects in the coming weeks.

We start with reflections on the 2021-22 crop year: anxieties of a severe drought, the lowest export volumes in 15 years, dramatic increases in farm-input prices, poor weather leading up to the seeding season, but barring any disaster, expectations of a good harvest. Though our exports in 2021-22 are expected to close below 30 MT, our outlook on 2022-23 crop-year exports are above 40 MT, even better, with an expectation of a rapid catch-up in this calendar year while prices remain high.

Then we turn to more familiar territory to most of you, how captivity of our overseas exports to bulk-trades squeezes producers’ margins and holds them back from pursuing a value-driven crop-specialization strategy. The next topic is our mission, one of trade-facilitation by attracting overseas buyers to procure grains directly from primary production sources; and by providing support in contract-fulfillment with efforts to improve container-supply, grain-handling, and logistics-services.

Finally, we conclude with good news on export prospects. Contrary to our fears, within a month of embarking on our interim strategy, we attracted several serious procurement agents working for major corporate-buyers in Asia Pacific. We will update you on these efforts with our next article, together with an overview of crop domains where we see the most promising containerized export opportunities.

Anxieties and uncertainties

The 2021-22 crop year was a tumultuous one for producers. They lived through a severe drought, with fear that it might be as bad as the last major one almost two decades earlier. This blow was coming just after the best export year on record, 2020, but the situation could have been far more severe if not for the much-improved drought-resistant crops being grown. Not much was being said about it, but advances in agronomy had paid off. Unfortunately, not all producers were as lucky as others; many were left with little to sell at the end of the 2021 harvest.

In addition to low volumes, there was another dimension to the crisis: the financial consequences of advance-sales. After a long stretch of good crop-years, a sense of complacency had set in; producers had stopped worrying about whether they would be able to meet contractual obligations. For many financially squeezed ones, pre-selling had become a way of survival, to make debt payments or cover pre-harvest costs. Those who found little to harvest at year-end still had liabilities, to pay back their advances or buy crops from elsewhere to cover contractual obligations.

The losses incurred by some were enough to put them under, while others had to take on even more debt to stay afloat. There has not been a fully transparent reckoning of the costs of meeting these obligations, but what you heard on media probably did not reveal the full extent of the suffering. Some are no longer farming, while others are teetering on the verge of bankruptcy, waiting to be pushed over by the next crisis. Ironically, there has been no institutional effort to further investigate farm-finances to see how many may be in line to collapse with the next shock.

As this disastrous harvest was coming to an end, another crisis was brewing: skyrocketing input-prices. Those who had survived the drought with tolerable yield declines, and those with financial reserves, had done most of their purchasing in advance. Those who were barely hanging in had delayed their input purchases, but into the winter they were facing the worst of the price-hikes. Into the next crop-year, however, everybody would have to face these higher input prices, thus all hoping for a good harvest and strong grain prices to cover the price escalations.

While Prairie producers were preoccupied with rising input prices, worried about whether grain prices were going to rise accordingly to leave behind viable margins or not, there was a huge shock to global grain markets in early 2022: Russia’s invasion of Ukraine. It was not known at the outset whether this was yet another power-play that would end like other border-skirmishes or the beginning of a long-drawn-out war. Few gave Ukraine any chance of resisting, let alone winning a long war, but still it was a major geopolitical conflict with larger regional and even global implications.

A major economic worry was oil-gas supplies to all of Europe, highly dependent on Russia, but an equally concerning matter was grain-supply. Russia was the world’s 7th largest grain producer and Ukraine 9th; together they accounted for roughly 15% of global grain exports, as much as Brazil, and 60% of the US. Fears of any disruption to exports from this block not only sent shock waves through global grain markets, but also raised global food-security concerns. Whether or not these worries were justified at the time, grain prices went frantic, and the turmoil has been ongoing.

The war did not have any material impact on Russia’s grain production levels, nor on its grain exports, other than short-term withholding of sales for geopolitical reasons. Despite devastation in urban areas and the death-toll at large, the war has not greatly affected Ukraine’s grain production either. Though its exports were halted for a while, now it seems there is an agreement to resume shipments. The volatility in global grain-markets has resulted largely from predictions being made speculatively, based on limited knowledge of the grain sectors of either country.

The worst was fearmongering over global food-security. The two warring countries together account for 6.5% of global grain production, but their exports represent a higher share, about 15% of the global total. However, their wheat exports, the most critical crop for global food-security, are as much as 25% of all wheat exports. But to put this in perspective, China’s wheat reserve-stocks are double the annual volume Russia and Ukraine export – opportunistically or altruistically, China could step up to the plate to release enough from its reserves to alleviate food-insecurity.

Not to diminish the immorality of the invasion, or the tragedy of the brutal war, but the impacts on global grain supply were exaggerated, typical of the sensationalism that engulfs geopolitical debates. This was particularly evident in grain-markets that tend to be driven more by speculative-impulses than supply-demand fundamentals. Markets went into a frenzy pushing all prices up; the turmoil still prevails, but with significant corrections since. Where they will close the year is anybody’s guess, but prices are likely to remain on the high side – naturally, music to producers’ ears!

We will come back to our price outlook, but first let us turn to how the seeding season got underway in the Prairies in the Spring of 2022. Weather patterns were erratic, some areas flooded while others were too dry to seed. Though delayed, seeding got underway in most parts of the region, anxieties prevailed as delayed seeding had eaten into the growth-season. Into the early Summer, weather patterns improved, if not turned favorable in most parts, but harvest expectations are still uncertain, and will vary by region and crop type. There is no hope for another bumper-harvest like 2020, but yields are expected to be much better than 2021.

Crop-year export outlook

In the calendar year of 2020, following the best harvest on record, our grain exports hit a record of 51 MT. But in 2021 we were hit with the worst drought since 2002, when our exports for that year were below 14 MT. Into the 2010s exports had climbed above 40 MT, before peaking above 50 MT in 2020. The severity of last year’s drought was feared to set our exports back to the levels of 2000s, but yields held up much better than expected. Together with carryover stocks from the 2020 harvest, we managed to close the calendar year of 2021 with 42 MT of exports.

However, the full effects of the 2021-drought had not yet cleared the system by the closing of the calendar-year. In January 2022, total grain exports to date in 2021-22 crop-year were only 63% of the same time the previous crop-year, 2020-21. Wheat exports were only 60% of the year before, durum only 48% and canola 58%. These 3 crops accounted for 70% of total grain exports, but the overall figure held out at 63% of the previous year due to better yields from smaller volume crops that made up the remaining 30% – barley 93% of the year before, soybean 83%, and lentils 81%.

Four months on, in May 2022, there had not been much of a catch-up even though in the interim the Russia-Ukraine war had broken out. Global grain markets had gone into a frenzy with fears of two major grain producers not being able to export while at war with each other. Prices were erratic but generally high, with a lot of panic-buying going on in fear of shortages; thus, if there were stocks, we would have been exporting more. Now we expect total grain exports for 2021-22 crop-year to come just shy of 30 MT, average of a decade ago but only 60% of 2020 calendar year.

This year’s delayed seeding and erratic weather early in the summer caused fears, but now harvest prospects are quite optimistic, if not across the board, at least for most regions and crops. Total output may not be anywhere near the stellar 2020-harvest, but certainly it will be much better than last year. While high grain prices prevail, with strong appetite to buy in most parts of the world, there may even be prospects to lift exports during this calendar year (2022) above where 2021-22 crop year is likely to close (30 MT), perhaps even closer to 2021 calendar year (42 MT).

While we have been talking about export volumes here, the focus of our efforts is not that, not even what prices those volumes fetch in global markets; we are more concerned about what trickles down to producers’ pockets at farm-gates. In this regard, our followers must be familiar with our views: producers get a fair shake from North American grain-trades, as they tend to function competitively under the market discipline imposed by corporate-purchases by cutting out intermediaries (traders or consolidators) where they have no value to add to grain-chains.

Overseas exports, however, is a different matter; they are largely captive to bulk-trades, with too much market power in the hands of a few grain companies that are the gate-keepers of bulk-systems. This captivity not only squeezes producer margins but also holds back diversification to higher value crops. Simply put for our new followers, our mission is to open direct-sales channels to overseas markets, which currently are limited, if they exist at all. If successful in our mission, we will give rise to the same conditions in overseas exports as those in North American grain-trades.

Ironically, the better the crop-year, the more producers suffer from their captivity to bulk-trades. North American demand for grains is mature with little growth; in a bumper-crop year like 2020, a much larger share of total grain output must be exported, and in the absence of alternative channels, it is mostly exported in bulk. In years like that, producers are generally euphoric with the volumes they grow, thus do not realize what they are foregoing. But these are the years to put away excess profits to cover the inevitable bad crop-years when even costs cannot be covered.

A year like the one we are foreseeing is the time to be looking for alternative export channels. Generally, these good crop years come with lower prices, an excess supply-effect, but this one is different in that there is an external-shock to global grain-trades with two major exporters at war with each other, stoking fears of supply-shortages. Our platform feels the global-supply situation is not as severe as most fear, but that does not matter in the short run, as perceptions are as powerful a market influence as reality, thus high grain prices are likely to prevail.

In our recent articles we laid out our “divergence-hypothesis” between North American and global grain prices, with the former likely to be lagging due to stable supply-demand, but many global buyers are carried away with supply fears, thus willing to stock up at high prices. These opportunities do not come by very often, thus we adjusted our priorities to kick-start direct-sales initiatives earlier than we had intended. Our plan was to wait for the launch of our new trade-facilitation platform, but now we are pursuing an interim strategy, which we will get into below.

At the outset, however, we want to clarify our motivation in rushing into direct sales initiatives. We see Prairie export volumes picking up for the remainder of this calendar year, even if they remain captive to bulk-trades; under prevailing global market conditions, there is no danger of unsold grain stocks building up. But our concern lies elsewhere: what producers are going to get in the absence of alternative channels? The answer is obvious: they will not receive their fair share. Input costs have risen considerably last year, and we expect this trend to continue into next, but we fear that farm-gate prices will fail to increase at the same rate.

Alternative export channels</