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Bigger U. S. grain supply, markets rally

DON BOUSQUET It’s Your Business

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

Grain and oilseed futures at ICE Futures Canada in Winnipeg closed the week ended Dec. 12 higher with gains in the U. S. grain and soy markets boosting prices. Canola saw solid gains, rallying back almost to the $400-per-tonne level, as China came to the market for several cargoes of canola. The firm tone in the U. S. market and slow farmer selling contributed to the strength. The weak tone in outside markets, as the U. S. auto bailout failed, did put downward pressure on prices. Commercials were the main participants in the outright trade with commodity funds rolling their January futures into the March contract. Western barley also bounced back though gains were more modest than canola. The firmer tone in the Chicago corn market and slow farmer selling of barley helped to support values. End-user demand was a bit better.

Chicago soy complex and corn futures rallied sharply from contract lows, with some gains tied to improving stability in outside markets and the weak U. S. dollar. Soybeans also advanced on strong demand, with China a strong buyer of U. S. soybeans this week. Chinese buying continues to run at a stronger pace than analysts had predicted. Relatively tight U. S. soybean supplies also underpinned the market. U. S. corn futures rallied sharply as crude oil prices bounced back and the market started to focus on concerns that U. S. corn acres would be lower in 2009.

U. S. wheat futures rallied moderately on ideas that wheat has now put in its seasonal low. The firm tone in corn and soybeans and the gains in outside markets also gave support at all three U. S. wheat futures markets. However, demand continues to be lacklustre and that accounted for the wheat rally being smaller than the soy and corn rally.

Stocks up

The U. S. Department of Agr icul ture brought out its latest supply/demand reports and raised U. S. and world grain ending stocks, but left the U. S. and world soybean ending stocks little changed.

For corn, USDA raised 2008-09 ending stocks to 1.474 billion bushels from 1.124 billion bushels in its November report. The higher ending stocks generally reflected a 300-million-bushel decrease in corn used for ethanol production. This is still a relatively tight ending-stocks level and is not burdensome.

The market reaction was to rally as it started to focus on the 2009 crop. Private estimates are indicating that U. S. corn acreage could drop as much as five per cent at a time that demand will remain relatively high. This report has not turned corn bearish and the rally only proves it.

USDA pegged U. S. 2008-09 wheat ending stocks at 623 million bushels, up from 603 million in November. This is a relatively minor increase. The global 2008-09 wheat ending stocks were increased to 147.4 million tonnes from 145.3 million, mainly due to the larger Canadian wheat crop.

This is also not particularly bearish for the market, but news that Russia might subsidize its exports is very bad news and will have to be watched to see if the government decides to do this. With oil prices falling, analysts feel Russia does not have the money to subsidize wheat exports.

The U. S. 2008-09 soybean ending stocks were pegged by USDA at 205 million bushels, unchanged from the November forecast. This is relatively tight and does not reflect the exceptional Chinese buying, which is running well ahead of forecasts. Global 2008-09 soybean ending stocks were 54.19 million tonnes, up only fractionally from the November forecast of 54.06 million tonnes.

None of this has turned oilseed markets bearish, although the shift into soybean acres in the U. S. from corn could have a longer-term bearish impact and will have to be watched.

It is a market axiom that when markets rally after bearish reports, the fundamental outlook is changing. It does look like ag markets are starting to break away from the outside financial market turmoil, although this is not yet confirmed.

Left over from the Dec. 4 Statistics Canada crop estimates are a look at oats, flax and durum.

StatsCan pegged the 2008 durum crop at 5.519 million tonnes, up from its September estimate of 5.07 million tonnes and last year’s 3.681 million tonnes. Even though exports remain fairly strong, the larger supply will push durum ending stocks up to over 1.5 million tonnes. The result will be a lot of durum being carried on-farm.

With international prices being dominated by sales out of Europe the average durum prices will be at least 30 per cent below last year.

Oats pressured

Oats production in 2008 came in at 4.272 million tonnes, down from the September estimate of 4.321 million tonnes, due mainly to a revision down in oats acres. Unfortunately this small reduction will still leave oats 2008-09 ending stocks well over a million tonnes, as exports continue to lag last year by over 30 per cent. Oats prices will be well below last year’s level with competition from Scandinavian oats and reduced U. S. demand likely to pressure the market down to the $1.50-$2.25/bu. area this year. Watch for a lot of oats acres to be switched to something else in 2009.

StatsCan pegged the 2008 flax crop at 861,100 tonnes, up from the September forecast of 767,900 tonnes as higher yields and acres accounted for the larger supply. Exports will be lower, to both the U. S. and non-U. S. destinations, which will result in 2008-09 ending stocks climbing to over 200,000 tonnes from just 172,000 tonnes last year.

Prices are likely to fall back now that the end of navigation on the Great Lakes is approaching and I look for cash prices to hold in the $8.50-$9.50 area until the spring, when bookings from Europe will lift values.

Fertilizer markets have come down in the past month, sharply in some cases. Initially, I was looking for even weaker prices in the spring. However, I am not as sure about that now as the low level of fertilizer bookings both in Canada and the U. S. suggests demand could be exceptionally strong in the spring. That fact, combined with the reduced production at many of the mines, suggests that fertilizers will make their lows during the winter and work higher during the spring.

– 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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