Are We Heading Back To Dismal Grain Prices?

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

Grain and oilseed prices at ICE Futures Canada in Winnipeg closed the week ended July 17 little changed for canola, but moderately lower for barley. Canola was little changed on the week despite fairly strong gains in the Canadian dollar. Offsetting the dollar were the production problems for the canola crop as well as some fresh export demand. Also giving support was slower farmer selling and a strong upward surge in vegetable oil prices. Exporters and crushers were fairly good buyers while commercials and speculators were sellers. Western barley moved lower on ideas that barley is overvalued against U. S. corn and U. S. distillers dried grains. Improved weather for the barley crop also weighed on prices.

Chicago soybean and corn futures ended the week steady to lower. Soybeans saw big losses in the old crop as speculators continued to get out

of the market. However, the new crop was actually a bit higher on strong exports and slow farmer selling. Weighing on the new crop were the favourable growing conditions. Corn futures posted small losses on news China was going to sell two million tonnes of corn from Chinese government reserve stocks. Also pressuring the market down was the favourable crop outlook that has some traders talking about record yields. However, giving corn support was the weak U. S. dollar and exceptionally strong exports.

U. S. wheat futures actually rallied during the week on ideas the market has put in its seasonal lows as the U. S. winter wheat harvest winds down. There was increased export demand for U. S. wheat, although it was not overly aggressive. Speculators, who have been short wheat, have started to buy back their futures contracts on ideas the market has put in its lows. The favourable outlook for the spring wheat crop did weigh on prices.

DROPPING BACK

The recent decline in both the Canadian and U. S. grain and oilseed markets has got farmers concerned that we are heading back to the dismal prices of the first part of this decade. In the grain trade many analysts are looking for soybeans to drop back to the $6-per-bushel level and corn to fall below $3 per bushel. They also feel that wheat will drop below $4/bu. This would ultimately put barley back below $2/bu. and canola back to the $7/bu. level.

Personally, I am highly skeptical about this happening. The 20th century in agriculture was dominated by increasing yields and the lowering of prices through the entire century. Our ability to produce was greater than demand.

My feeling, and those of many analysts, is that the 21st century will be dominated by rising demand as China, India and other parts of Asia become the world’s driving economic force, while those countries improve their diets using grains and meat. We have almost exhausted our ability to increase yields. And the only major method we have available to improve yields is genetic modification. Whether you agree with it or not, it is the wave of the future. China is aggressively looking for genetic

improvements in everything from wheat to cotton. Within 10 years, GMO varieties are expected to be available for all grains and oilseeds.

While this will improve yields, it will just make it possible for the world’s farmers to meet the growing demand. We have already seen in the past two years what rising demand from Asia has done to prices, even though there have been no major crop problems.

Will we see U. S. corn futures down to $3/bu. in the next few months? Possibly. Can it drop lower or even remain at that level? Not likely. The possibility of record-high yields does exist. However, here also, the likelihood of record yields is low, as the crop is as much as six weeks behind normal development.

While frosts last year were unusually late (saving the canola crop), it’s felt that the coolness this year is going to bring an early frost. In fact, some parts of the Prairies have seen frost every month in 2009. The coolness is depriving the U. S. corn crop of the heat units it needs to maximize yield. These factors will offset the possibility of record yields.

Another factor that will keep the corn market from staying at the $3/bu. level is the exceptional demand that these lower prices are stimulating. Last week, once again, the U. S. Department of Agr icul ture repor ted that fresh corn export sales came in above 1.1 million tonnes, catching the trade by surprise.

On top of that, while demand from the livestock industry is falling, the ethanol industry has turned profitable and is fairly aggressively booking corn. I think as the year goes on we will see USDA lower the 2009-10 U. S. corn ending stocks estimate back to the one-billion-bushel level and corn prices will climb back to the $4-$4.50/bu. level.

I am looking at corn because it is the main grain that sets the tone for other grains and for oilseeds. However, the same facts apply for soybeans and wheat. In fact, we are already seeing wheat set its lows just under $6/bu. on futures, well above the 30-year price average of US$350 per bushel in the second half of the 20th century.

DEMAND EXPANDS

Even if the soybean crop, which is also running over a month late, can get through without frost damage, demand is still outstanding for the crop. Although U. S. herd liquidation is a problem for soybeans as demand for soymeal has slipped sharply, foreign demand is expanding.

The falling soymeal demand is good news for canola as falling demand for the meal component of soybeans is forcing the price for soyoil higher. This supports all vegetable oils and spills in to improve crush margins. This ultimately pushes high-oil-content oilseeds such as canola higher.

As I pointed out in earlier columns, this is going to be a very volatile year, but overall average prices will be higher as the world’s demand is rising. Just as important as demand rising is the ability of buyers to pay for the grains and oilseeds they need.

With the shift in the global economy to Asia, the buyers do have the money they need to buy our grain. Their ability to produce is almost at capacity, which means they will be buyers for many years to come and western Canadian farmers will benefit from this.

Farmers have known what speculators are just figuring out: food is grossly undervalued. In the first half of 2009, speculators have moved US$7.8 billion into agricultural commodity futures and the “specs” think the best times are yet to come. Farmers have always known that.

– 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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