Can Old-Crop Canola Be Facing $7.50 A Bushel?

Grain and oilseed futures at ICE Futures Canada in Winnipeg c losed the week ended March 27 lower, with losses in the Chicago market and the firm Canadian dollar weighing on values. Canola posted small losses as sluggish export demand also weighed on prices. China has indicated its canola buying in April will fall to just 65,000 tonnes from 160,000 in March. The approaching Chinese rapeseed harvest is cutting into demand. However, the losses were limited by a slower pace to farmer selling and some technically based support in the market. Western barley also saw small losses on the weakness in Chicago corn. However, the sluggish level of farmer selling and the very firm cash market in southern Alberta kept the decline modest.

Chicago soybean and corn futures posted losses with moderate declines in soybeans and only small losses in corn. Soybeans were undermined by bearish technical signals, weakness in soymeal and talk that the government mandate for soyoil-based biodiesel might not be implemented in 2009. Expectations that the March 31 U. S. Department of Agriculture planting report would show higher soybean area also weighed on prices. Corn futures posted modest declines as a late-week weakening in crude oil prices weighed on values, as did steady farmer selling. However, keeping losses small were another week of very strong U. S. corn exports and ideas that the USDA planting report will show lower corn-planted area.

U. S. wheat futures declined at all three U. S. wheat markets, with Kansas City wheat seeing the biggest losses. The entire market – the K. C. market in particular – was undermined by the arrival of badly needed moisture for the U. S. winter wheat crop on the Great Plains. The sluggish nature of exports, as Russian wheat continues to be offered well under the U. S. market price, also weighed on prices. The losses in Minneapolis spring wheat futures were the smallest wheat losses of the three markets, as expectations that spring wheat acres would be down combined with the threat to spring wheat planting from the flooding in the Red River Valley of North Dakota, to give spring wheat support.

EYES ON CORN

By the time you read this, USDA will have released its March 31 prospective planting report. The report is expected to show a drop in corn acres, higher soybean acres and lower spring wheat acres in the U. S. in 2009. The report is expected to set the tone for the grain and oilseed markets for the next month. I will analyze the report and its potential impact on Canadian prices next week.

The U. S. corn acreage number is also being looked at to assess demand for fertilizers this spring. Higher-than-expected corn acres would increase fertilizer demand and raise those prices.

The market is also assessing the canola outlook for the old crop, as it looks like prices may have considerable downside. The 2008-09 crop year began with an available supply of over 14 million tonnes after farmers produced a record crop of 12.6 million tonnes in 2008.

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To date, farmers have delivered 7. 42 million tonnes, or half the available supply. Between now and July 31, farmers are expected to deliver about 4.8 million tonnes of canola. The reason for the heavier pace of deliveries is the need for springtime cash flow as well as the unwillingness to hold canola through the spring and summer as conditions warm up and it becomes difficult to keep the crop cool. Need for space to store the new canola crop is also behind the expected increase in farmer selling.

The pace of movement in these last four months of the crop year is expected to be a bit higher than the previous eight months as a result. Traditionally, however, demand starts to slow in the spring and summer. Forecasts suggest demand will be for about four million to 4.3 million tonnes of canola through the last four months of the crop year. This means farmer deliveries will outstrip the level of demand.

The result is that grain companies are expected to hold the extra supply. As of March 22, companies were holding 1.1 million tonnes of canola, the first time they have had over one million tonnes of supply this year. They usually only are willing to hold large supplies if cash bids fall.

We have already seen the cash bids drop substantially this month. About three weeks to a month ago, cash bids to farmers in the Calgary area were at a record $20 over futures prices. They are now below a $10 premium to futures. Over most of Western Canada, the average cash bid has dropped to about $9/bu., with local prices ranging 50 cents a bushel above or below that average, depending on location.

With more canola supply expected to come to market in coming months, all signs point to cash bids falling, with some canola values on the Prairies likely dropping as low as $8/bu. Some analysts are forecasting they could fall to $7.50/bu.

NEW-CROP CANOLA

Before you get too depressed about the outlook, note that this is for the old crop after record acreage and record yields. I think farmers will only have to face these poor prices for a very short time and that following the harvest we will see values firm up as lower 2009 acres and normal yields will help to lift the market.

All signs point to 2009-10 seeing canola ending stocks drop to the 1.5-million-tonne level, which will quickly pull canola cash bids back toward the $9/bu. level in the new crop year. There are also signs that crude oil could see further increases in price over the next eight to 10 months, which will also help to lift the canola market.

What will limit the upside in the canola market will be the size of the U. S. soybean crop. We will have an idea of what to expect after the March 31 USDA planting report. The early indications are that U. S. soybean acres will be a record and that soybean prices will be depressed. This may limit the ability of the canola market to climb much above the $9/bu. level in 2009-10.

– 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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