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Are Higher Wheat Prices Real?

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

Grain and oi l s e e d prices at ICE Futures Canada in Winnipeg closed the week ended Nov. 27 fractionally higher. Gains in the U. S. markets, friendly technical signals and slower farmer selling gave some support . However, the firmer Canadian dollar, the uncertainty surrounding canola exports to China and economic instability caused by credit concerns in Dubai weighed on the market, holding prices little changed. Technically, the market challenged resistance at $410-$411, but was unable to convincingly break through. Western barley was a bit lower on a lack of demand amid very thin volumes and very little interest in the market.

Chicago corn and soybean futures rallied, with a weak U. S. dollar giving some support. Soybeans also were lifted by a slower pace to farmer selling as the harvest wound down, and by strong export demand as China remained a big buyer. Corn futures rallied as the delays in the harvest and unexpectedly strong export demand boosted prices. Friendly technical signals triggered speculative buying in both commodities.

U. S. wheat futures declined as the ample global and U. S. wheat supply weighed on the market. Sluggish fresh U. S. exports contributed to the declines in all three U. S. wheat futures markets. Losses were small, though, as the weak U. S. dollar and friendlier technical signals gave support.

The Canadian grain trade is still looking for a successful resolution to the Chinese embargo against canola with blackleg. The feeling is that it will happen soon. The trade feels that the move originally was to deal with the fact that Canadian canola imports to China were coming in US$20 per tonne under domestic Chinese prices, and that the move by China was made to stimulate demand for Chinese rapeseed. If true, this is a valuable lesson to be learned in dealing with the Chinese.

VERY, VERY OVERVALUED

Analysts from around the globe are looking at the rising wheat market and scratching their collective heads. The market is rising at the same time as global and U. S. stocks of wheat are climbing. In fact, the U. S. stocks-to-use ratio for 2009-10 will be the highest level in 20 years while the U. S. ending stocks level will be at a 10-year high.

Despite this, U. S. wheat prices have climbed back to the US$6-per -bushel level several times and do not look like they are set to drop to the $3/bu. level that many analysts have been predicting. The Canadian Wheat Board, in its latest pool return outlooks (PROs), has actually raised its wheat price forecast.

The conventional wisdom is that wheat is very, very overvalued. In the latest U. S. Department of Agriculture report, total U. S. 2009-10 wheat demand was 2.098 billion bushels, well below the five-year average of 2.205 billion bushels. U. S. 2009-10

ending stocks were pegged at 885 million bushels, well above the five-year average of 506 million.

This suggests that we should be back to the dismal prices of 2004 to 2006, when values fell well below $4/bu. In fact, stocks-to-use ratios and ending stocks of wheat in the U. S. were actually in better shape in 2005-06 than today.

Globally, the situation is no different, as the International Grains Council last week pegged 2009-10 world ending stocks at 191 million tonnes, the highest level in over five years.

So, with all of this supply around, why is the market firm? The traditional explanation is that the U. S. dollar is falling and that is making all commodities, including wheat, worth more in U. S. dollars. However, this does not explain the magnitude of the rise we have seen in wheat.

The other part of the explanation for the rising wheat prices is that commodity funds have started to buy wheat futures as a way to offset the falling value of the dollar. Funds have been large buyers of wheat, as they have felt wheat prices are undervalued when compared to $4/bu. corn and $10/bu. soybeans.

Also giving some support to the wheat market is the expectation for global wheat acres to fall. The International Grains Council is forecasting that global wheat acres will drop 1.5 million hectares, to 222 million. This is less than a one per cent decline. However, it also acknowledges it may turn out to be more than this amount. In addition, yields are likely to fall, as lower prices limit the use of yield-boosting inputs.

This also partially explains the rise in wheat prices. However, the IGC’s forecast drop in wheat acres is still two per cent above the five-year average and the 2010 crop should outpace consumption.

CONCRETE VALUE

All of this still suggests wheat values are overpriced and those values should come down. We then come back to the hypotheses of last week’s column, that the falling U. S. dollar and low interest rates are raising the intrinsic value of wheat.

I firmly believe people are becoming disenchanted with the global economy and feel much more comfortable with owning things that have a concrete value, such as wheat.

As a result, I think the price of wheat is not as overvalued as many think. I still feel Chicago futures could drop to the $4.75-$5/bu. level on the large supply, but I also think the outlook for wheat is turning.

The bearish outlook for wheat has developed as production has increased 70 million tonnes, from 598 million in 2007 to 668 million tonnes in 2009. We could easily wipe out this increase as farmers swing to planting more valuable grains and oilseeds and we could find ourselves back to the tight ending stocks levels that drove the market up in 2008.

With the lows not expected to be as low as they were in 2005-06, we will be starting any rally from a higher level, which means wheat prices should be able to rally back to the C$9/bu. level by 2011.

Unfortunately, the durum outlook will only be helped mildly by this friendlier wheat market in 2010-11. The huge oversupply of durum in Canada and globally accounts for top grades of durum being at almost a C$50-per-tonne discount to the equivalent grade of spring wheat.

This is not likely to change quickly, although weather does have the potential to radically alter durum supply-demand balance sheets. It will likely take about three to four years to see durum prices back to their traditional relationship with spring wheat. In addition, farmers are going to be carrying a lot of durum on-farm for at least two of those years.

– 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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