Interest rates and the grain markets — carrying costs, risk, and price outlooks

(Kara Oosterhuis/RealAgriculture)

On October 26th, the Bank of Canada announced a 50 basis point interest rate hike — marking the sixth raise of the calendar year.

Brennan Turner, grain market analyst and founder of Combyne Ag, says because we’re in an environment of high inflation, we’re going to see a few more of these increases over the coming months. For business owners, scenario planning as we look ahead is going to be key.

“From a farm operational balance sheet standpoint, if you think about any requirements to refinance, or if you’re looking at variable versus fixed, those are some decisions that I strongly encourage you to have with your banker sooner than later,” he explains.

From a grain marketing stance, Turner explains there tends to be an inverse correlation between interest rates and grain markets, where interest rates go up, and grain markets tend to go down.

“People just don’t want to hold on to inventory as much, because the higher carrying costs essentially. And that being said, there’s just so many other variables I think that are affecting the grain markets — principally supply constraints and tight balance sheets. As well, some of the geopolitical risks that are in the market today,” he explains. “I think that those other variables and factors are probably weighing greater or more impactful on grain markets than what interest rates increasing would have.”

As inflation soars, it has implications of a potential recession, which has raised the concerns of many. When it comes to grain marketing, the biggest question surrounds demand, and how it changes in a recession.

“There’s certainly a bit of a dip that we can probably expect in there. And this is why I’m not expecting grain markets and specific prices to get back to the record levels that we saw in the 2021/2022 crop year.”

That being said, this crop year did see a decent rebound in production. Combine that with a tight carryover, and so any crops, there’s still really good prices in the grain markets, says Turner.

“Let’s call a spade a spade — most commodities are probably sitting somewhere between 50 to 150 per cent above the three year average in terms of what prices are today for wheat, durum, barley, peas, lentils, and so forth.”

Check out the conversation between Turner and RealAgriculture’s Kara Oosterhuis on RealAg Radio, below: