Both Canadian and United States durum acreage are below historical levels, with rumblings that acreage may fall in the upcoming crop year. Canada's seeded acreage of durum in 2012/13 was 4.7 million acres, below the average of the previous 10 years of 5.05 million acres, with one Grainworld conference forecast suggesting acreage could fall by another 400,000 acres to 4.3 million acres in Western Canada.
Canada's current movement of durum is at a near record pace. Agriculture Canada has set a lofty target of 4.15 mmt of exports for 2012/13, while current movement as of week 29 data is 2.521 mmt, which is 22.9% ahead of last year's pace and 30.5% ahead of the previous three-year average. One of the largest driving forces was drought-related crop shortfalls in such growing areas as Spain and North Africa.
The question remains why durum is not viewed as an attractive alternative for the upcoming year? The answer lies in its weak performance relative to wheat this crop year, while unlike many other cropping alternatives, durum has provided few price signals for the upcoming crop year.
After an excellent presentation on durum markets at the Grainworld conference in Winnipeg, Senior Durum Merchandiser John Griffith from CHS Inc from Kansas City was questioned by a conference participant over the lack of pricing signals for new crop durum. The participant suggested that on his own farm, in prime durum growing area in southwest Saskatchewan, a decision was made to grow canaryseed at 27 1/2 cents per pound due to the lack of durum pricing opportunities. He went on to say that many other much smaller-acreage crops in Saskatchewan have new crop pricing opportunities available whereas durum price signals are not so clear.
The answer is perhaps complex, but the lack of a liquid hedging tool leaves durum buyers and pasta manufacturers unable to effectively manage their flat-price risk is largely to blame. The explanation also offered the suggestion that the cost of goods sold (COGS) for pasta has a higher correlation to the cost of durum than is found in some other grains and their finished products. As a result, buying windows have been shortened over time, with one panel participant suggesting mills that used to buy some eight to nine months in advance would now rather buy just 30 to 40 days in advance, in order to more effectively manage risk.
Here's one more theory, and it's because they can. Another presentation made reference to the fact than the Canadian Wheat Board has historically balanced export sales to meet demand over the years. In order to protect the returns generated in the pools, the taps were turned off at the appropriate time leaving growers to either dump grain into feed or ethanol markets if cash flow was required, or hold product for the next crop year. While this may have worked to support results in the pool, it also gave durum buyers the comfort level of having backed-up stocks on the Canadian prairies which lowered their risks in originating necessary volumes in future positions. While the estimated carry-out for 2012/13 is 1.3 million metric tonnes, the average over the past 10 years is 1.9 mmt.
Times are changing. As one producer suggested, the whole world can now bid on his acres, with those commodities showing the best prospects winning the battle for acres, as one would expect should happen.
Twice in recent months I've seen presentations made by Canadian millers of wheat for flour focusing on the impacts of the new de-regulated marketplace. After years of being offered their wheat supplies by the Canadian Wheat Board at the exact same price as the competing mills down the road, operations are now forced to think outside of the box in order to compete for their wheat supplies while managing the associated risks. Another Grainworld presenter made mention of supply relationships being forged between producers and mills and bakers within the industry, even the notion of potential for vertical integration in the chain between the bakery and the producer.
Rome wasn't built in a day. Durum millers will eventually be forced to compete for acres and provide competitive and timely price signals in order to assure supply from the major exporting region of quality product in the world. It's difficult to say how this industry will look in the years to come although the actions of prairie farmers will be watched closely by durum users who may be forced to adapt their business models.
Cliff Jamieson can be reached at firstname.lastname@example.org
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