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Are grain prices recession-proof?

DON BOUSQUET It’s Your Business

For three-times-daily market reports from Don Bousquet and RNI, visit “ICE Futures Canada updates” at

Grain and oilseed futures at ICE Futures Canada in Winnipeg closed the week ended Jan. 2 higher with a firm tone in the U. S. markets contributing to the gains. Canola rose back over the significant $400-per-tonne level. Canola was also supported by persistent but unconfirmed rumours that China was buying canola. Slow farmer selling also gave some support. Western barley was a bit lower, as gains in U. S. corn and slow farmer selling gave support, but those were offset by slow demand.

Chicago corn and soybean futures posted good gains. Soybeans approached the $10/bu. level as dryness in South America, strong demand for U. S. soybeans by China and the weak U. S. dollar all gave support. Chicago corn values rallied above the significant $4/bu. level as slow farmer selling, steady demand and the weaker U. S. dollar all combined to lift the market. Across the U. S. markets, the commodity funds returned to buy corn, soybeans and wheat as technical signals suggested the markets had bottomed and were rebounding.

U. S. wheat futures rallied, with prices rising above the $6/bu. level as spring wheat futures looked like they might advance as far as $7/ bu. Friendly technical signals, weakness in the U. S. dollar and steady – although not exceptional – export demand all helped to boost the market. There was also some concern about damage to the U. S. winter wheat crop. Both Argentine and Australian wheat crops also were showing increased amounts of damage.

Impact unknown

There is no question that we are heading into a severe economic recession. The question is what happens to the grain markets in this scenario.

Current economic problems will have some impact on the grain and soybean outlook, but to what degree is a great unknown at this time. However, the bounceback in prices in the past two weeks to almost 100 per cent above the 30-year average suggests grain and oilseed values are “recession-proof.” People will drive less in a recession, but they do not eat less.

It has been proven by U. S. Department of Agriculture studies that people’s consumption of calories stays relatively unchanged in good times or in bad times. However, what changes is where the calories come from. In good times, more meat is consumed while in bad times, more vegetables and grains are consumed.

As a result, food is felt to be more recession-proof than other sectors of the economy and grains are felt to be more recession-proof than other commodities. It’s interesting that one of the only two companies whose stock price rose in the U. S. in 2008 was McDonald’s. The other was Wal-Mart, which has a major food section in most of its stores.

The world cushion of grain and oilseed supplies is exceptionally tight. In fact there is virtually no cushion in the marketplace. Any threat to production will find no supplies to draw on and the result will be a strong rally.

Soybeans and canola have both benefited from the strong demand from China. In the U. S., China is the single largest buyer of soybeans while in Canada, they have been a significant buyer of canola seed and canola oil.

While the Chinese economy is slowing from the amazing levels seen in recent years, the Chinese economy is still expected to see growth of six to eight per cent, compared to negative growth for most of the rest of the world. On top of that, China’s foreign reserves are over US$2.5 trillion. China’s government has aggressively been stimulating its economy trying to maintain a good lifestyle for its people. China will continue to be a strong buyer of oilseeds.

The tightening of the global credit situation is having a greater impact on the production side of the grain supply/demand equation than on the demand side. There is one notable exception, in pulse and specialty crops, where it has cut demand.

However, the tightness in credit has already caused South American soybean planting to be reduced and Brazilian farmers are also going to have problems getting credit to buy chemicals needed to fight soybean rust, which is a major problem for South American yields.

All of this suggests soybean prices will remain in an $8-$10/bu. range. Canola should remain in the $400-$425/tonne range. Should crude oil see a big rally, these prices could be pulled even higher.

Support for corn

U. S. corn demand has been cut by the recession as falling meat demand reduces the need for livestock feed. On top of that, there is now a question about ethanol, because of the drop in crude oil prices. However, the incoming U. S. administration is fully behind biofuels and the recent weakness in ethanol reflects the falling demand from U. S. consumers for all fuels. It is not a function that less ethanol is being used but that all fuels are seeing reduced demand. When that demand turns around (and it looks like it’s already doing so), demand for biofuels will rise.

This will help to boost corn prices. The current U. S. stimulus package suggests we will see a modest rebound in the economy by late spring or early summer in the U. S. and that will be good news for fuel consumption and meat consumption.

U. S. corn futures will have to approach $5/bu. to keep too many acres from slipping from corn into soybeans. However, the credit tightness and the high input costs for corn are dampening down planting in the U. S. and the rest of the world.

Global wheat demand should remain strong while global production falls due to poorer wheat prices. We have already seen U. S. wheat values climb above the $6/bu. level as the focus of the market moves from a record-large global wheat crop in 2008 to lower 2009 wheat acres.

The threat from Russia to start subsidizing wheat exports is fading as its badly needed revenue from oil has dropped sharply.

As a result, the wheat outlook is stronger as demand is high and tends to get higher in recession years as more grains are used for human consumption. We are not likely to see the astronomical prices for wheat we saw in 2007-08, but prices will be reasonable.

With the lack of a significant cushion to protect us from grain and oilseed supply shortages, there is a higher-than-normal possibility of a return to record-high prices. Regardless, even if supply continues on course without production problems, prices are set to remain strong, relative to the economy, through 2011.

– Don Bousquet is a well-known market analyst and president of Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.



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