Short Wheat Crop on Prairies May Affect Stock Market Prices

A. W. BLUE September 15 1929

Short Wheat Crop on Prairies May Affect Stock Market Prices

A. W. BLUE September 15 1929

Short Wheat Crop on Prairies May Affect Stock Market Prices



Hundreds of thousands of dollars are lost annually in Canada through careless investment. Fraudulent and worthless securities are being constantly poured on to the market to trap the unwary. A general observance of this simple maxim will assist in the reduction and elimination of this economic waste— "BEFORE YOU INVEST—INVESTIGATE”

THE Canadian stock markets have passed through a protracted period of drought. After months of depression and comparative inactivity, extending from midwinter to long past midsummer, the markets are at last displaying some signs of reviving vitality, but so far the old-time spontaneity and uniformity of movement are lacking. The 'speculative public, profiting by the expensive lessons of the past, is pursuing a more sober and prudent market policy, and is not extending commitments beyond its means. Perhaps the time will come again, when caution will be thrown to the winds in the enthusiasm to garner easily won profits, but that time is not yet.

The record of the past few months represents an interesting chapter in market history, especially in the diametric character of the market itself, and the attitude of the general public toward stock speculation as contrasted with the bullish enthusiasm in evidence throughout the three or four years preceding. In February last, the Canadian markets turned downward; the decline became sweeping and drastic late in March, when Wall Street experienced one of the sharpest setbacks in history. Canadian stocks displayed little or no rallying power even in the face of more favorable conditions in New York; and weeks after, when liquidation had run its course, the market remained dull, featureless and indifferent. Its performance was the more striking in view of the fact that Wall Street, after recovering from its spring distress, staged a strong comeback, and set the bull market in full swing again. It has been said that Canadian stock markets inevitably follow the trend of New York. Such was not the case this year. It has been a lean period for speculators, and patience has become a genuine virtue.

But we are not here so much concerned with the action of the market itself, as with the underlying causes which brought about this sharp reversal of form, and the possible extent of their influences upon the markets in ensuing months.

In some knowing quarters the simple explanation was offered that stocks were too high, and that they simply had to come down. This does not thoroughly satisfy, for in the first place, it is extremely difficult to say when stocks are too high, and in the second, they seldom come down of their own weight, without the stimulus of some outside influence. To money conditions must be laid, the responsibility for the initial turn of the market early last spring. The warnings of the bankers, both in Canada and the United. States, will be recalled by all who keep in touch with financial matters. Unusual strain had undoubtedly been imposed upon credit by the greatly extended requirements of the markets to finance speculative transactions, and to absorb the flood of new security offerings which subsequently swamped the market. Added to this were the heavy demands from business sources, and finally an abnormal carry-over of wheat, which imposed an additional credit strain. And when the banks deliberately curtailed loans for speculative purposes, the underpinnings of the bull market became so weakened that a reaction was inevitable. But so severe was the decline that the credit situation automatically became materially improved, and it seemed that the bankers should be satisfied with the position of affairs.

The Wheat Situation

"DUT at that moment a new and equally unfavorable influence developed, namely, the evidences of abnormal surpluses of wheat, and the precipitate break in the wheat market to the lowest point in more than a decade. From January 1 to the end of April, No. 1 Northern at Winnipeg fluctuated between $1 15 and $1.30 as compared with $1 40 to $1.55 during the same period of 1928. During May the crisis developed, and by the end of the month the price of No. 1 Northern had broken below $1.05. A decline of this proportion was naturally disappointing to the public, for it was fully realized that the farmer could earn little or no profit under such conditions, and, therefore, general business was bound to be affected to some extent. Wheat, accordingly, prolonged the depression of the stock market.

But the markets were not through with wheat yet. For no sooner had it become apparent that the market had overdiscounted the adverse features of the oversupply situation—as is the usual practice of markets to overdiscount every situation, whether good or bad—than a new wheat factor appeared. It was early evident that western seed had not entered the ground under the most favorable conditions. There were frequent reports of an undersupply of moisture in the soil. The previous autumn had been dry and the winter snowfall light. Consequently, subsurface moisture was less than normal, and was likely to exercise an unfavorable influence upon the crops unless supplemented by liberal showers. The showers were not too liberal, however, and as spring advanced into summer it became more and more obvious that crops were suffering, and hopes of a normal harvest rapidly waned. The wheat market, of course, took full cognizance of this situation, and as reports appeared in the press that conditions were less promising than usual in the other wheat-growing countries of the world, a general forward movement commenced which has swept prices to dizzy heights. Daily newspaper reports, under scare headlines, of extensive damage and loss in the wheat areas of the country by heat and drought, cheered the bulls on to continuous and vigorous effort.

At the time of writing, there has not been any official estimate of yield published, but government reports indicate progressive deterioration. Any number of unofficial estimates are heard which range anywhere from two hundred to three hundred million bushels, as compared with more than half a billion bushels last year. It seems probable that there may have been some exaggeration of the gloomier aspects of the situation, but the fact remains that the crop is light, and many farmers will not get sufficient return to cover the cost of the seed sown in the spring.

Wheat, accordingly, has wielded an unusual influence upon the stock markets this year. The sharp advance in price could not overcome the apprehension that was aroused in the public mind, for no one in Canada forgets for a moment that agriculture is our basic industry, and that general business is likely to be affected in direct ratio as conditions in agriculture are good or bad. That is why the stock markets stagnated while the wheat crop deteriorated and wheat prices skyre :keted. Not even the fact that general business in Canada was highly prosperous throughout the first half of the year, and that the impetus carried business through the summer with unexpected buoyancy, could fully assuage the influence of the gloomy reports from the western wheat fields.

Market Prospects in the Fall

AND at this point we become conzY cerned with the prospects of business and the stock markets for the balance of the year. It is dangerous to offer a prediction where the stock market is concerned, and we shall not attempt it. A survey of the financial community, however, forcefully brings home this fact that sentiment is cheerful, more confident than has been the case in months. On the business situation the monthly publication of a leading Canadian bank makes this pertinent observation: “With the severe credit strain somewhat relaxed, and with wheat prices at a much more satisfactory level, there is no question but that prospects for the remainder of the year have shown substantial improvement.”

This is a cheerful interpretation of the outlook. Sober analysis of the general economic situation produces many supporting facts. Present indications point to a smaller world crop'this year. Nature is making amends for her lavishness of a year ago. High prices will offset in some measure a reduced yield, and the heavy carry-over from last year has become a tremendous boon. Of course, only tentative figures can be quoted at this season, but it seems reasonable to anticipate that the reduced crop marketed at the higher prices will return somewhere between $300,000,000 and $400,000,000. When the proceeds of last year’s carry-over, which will be marketed at current prices, is added, the total return for the 1929-30 crop season should not be far short of $500,000,000. And instead of another big carry-over it is probable that the surplus remaining at the end of the current crop season will be virtually negligible. The slate will be wiped clean, and conditions, accordingly, seem likely to favor the farmer for the next year or two at least.

The actual monetary return from wheat will be substantial, but, of course, it will not be evenly distributed, and that feature is decidedly unsatisfactory. As a result of this year’s experience there will be wholesale retrenchment in buying on the part of the western farmer. This general practice will be felt in many lines. But as one observant economist points out, the farmer was never in better shape to withstand a reverse, for as a result of a succession of three good crops he has been able to build up a reserve which should tide him comfortably over the present lean period.

There is another angle worthy of consideration. Suppose Canada were engaged in reaping a wheat crop similar to that harvested last year. If correspondingly favorable crop conditions existed elsewhere, the general effect would be lamentable. The markets of the world would be glutted, and prices would be correspondingly low. There would be little or no profit for anyone, and the markets would be cluttered with wheat for another year at least. Not only would markets be adversely affected this year, but next year and the next, or until Nature introduced corrective influences.

Nor is the crop situation entirely gloomy. The eastern farmer is reaping the advantage of the higher prices for grain. Crops in the older sections of the Dominion are generally satisfactory, and the buying power of the greater portion of the country is likely to be maintained at close to normal levels. General business has acquired such momentum as a result of the bumper crops of recent years that it should carry through at its present active pace. Industry has become so diversified, with a number of prominent lines such as newsprint, mining, and hydro-electric development—little affected by crop conditions—that the crop strain will be so distributed as to minimize the effect.

The financial markets would seem to have overdiscounted the crop situation. The low point of the market was reached at the end of May, and a gradual upward tendency has been maintained since, but average prices are still many points below the highs of the year. One of the hopeful features is the comparatively limited strain that wheat will impose on credit this autumn. Money from the sale of the crop should be released earlier than usual, and there does not seem likely to be any burdensone carry-over. Altogether there seems reasonable ground for confidence in business, and hope that the stock markets are not entirely devoid of avenues for speculative profits. The improved market tone in evidence some weeks reflects reviving confidence in the business situation, which is supported by the high level of industrial activity.

The Uses of Adversity

PAINFUL though their market experience has been to countless speculators, it has not been without its constructive aspects. One of the more heartening features is the close scrutiny that is now being directed to industrial conditions. A market which has its eye on realities is apt to be saner and healthier than one which is interested in its own technical and psychological position only. Earnings, present and prospective, are now subjected to keen analysis. This new attitude of studious caution, perhaps, explains the specialty nature of the market. There is no uniformity of movement. The public is concentrating on stocks of real merit and possibilities, and ignoring those whose outlook is obscure. It is not going to be so easy to make money in speculation in the future as in the past. Blood will tell in stocks as in horseflesh, and the speculator, to be truly successful, must be clear-visioned and resourceful. These are exacting times on the stock market.