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 Oct. 24 steady in barley and higher in canola in a volatile week as spreading global economic turmoil weighed on the market. Canola saw small gains as the market was supported by an unprecedented drop in the Canadian dollar, slow farmer selling and ideas that China has been quietly picking up canola at these “rock bottom” prices. Commercials were the big traders on the week. Western barley was little changed as weakness in U. S. corn, slow demand and bearish technical signals were balanced off by the lack of farmer selling.
Bullish news ignored
Chicago soy complex and grain futures closed the week lower despite the fact that the news was actually friendly. The market reacted to the financial meltdown that has dominated the global economy. Also weighing on the market is the requirement by investment banks that hedge funds liquidate market positions, and that selling was seen across the market.
Soybeans and soy products fell despite strong demand, with China continuing to be a big buyer of U. S. soybeans this week. Reports of soybean yield problems also appeared, but were largely ignored by the market. Corn futures plunged as the market ignored strong cash markets, strong export demand and the lagging corn harvest.
U. S. wheat futures fell despite continued good export demand, problems in the Australian and Argentine wheat crops and talk of falling winter wheat acres in the world. However, there was some bearish news here, as the record-large global crop continues to weigh on prices and the U. S. winter wheat crop is seeing favourable growing conditions.
Given the fact that the markets are ignoring bullish news and global supplies remain at some of their lowest levels ever, we are likely to see a strong pop-up in prices in coming days. How high that rally takes us will depend on how low the markets go.
Last week I mentioned that input prices, including those of fertilizers, were coming down and I got several phone calls about it – some in agreement and some disagreeing. The analysts I’ve talked to all point to fertilizer prices coming down as demand slows. The credit problems have already caused many farmers to back away from aggressive fertilizer use.
Brazilian farmers are now expected to buy about 24 million tonnes of fertilizer, down from earlier estimates of 26 million. However, there are some in Brazil who say demand will even be lower as credit being extended to farmers by Cargill, Dreyfus, Bunge and ADM has been completely halted and government credit is also very slow to appear. Brazil is the world’s No. 2 producer of soybeans and the world’s fourth-largest consumer of fertilizer.
Norwegian fertilizer company Yara International has halted production of urea
and ammonia at some of its plants due to a sharp drop in prices. Yara is not a large fertilizer producer, but this is a sign of problems. Urea prices have dropped to $305 per ton this week from $805 in July.
Russia and the Middle East have been steady sellers of urea and there appear to be building supplies which will keep this market from recharging in the spring, despite increased demand at that time.
Ammonia prices have not yet seen the big slide that we have seen in urea. However, the operative word is yet.
Phosphate prices (DAP) have also dropped, although not as much as the urea market. During the summer they were in the US$1,200-per-tonne level (basis Tampa, Fla. ) . The values have dropped (mainly in the last four weeks) to $850/tonne. Falling demand, as grain and oilseed market prices tumble, and the global credit crisis will eventually pull DAP prices down.
The market did not drop as much as other fertilizer prices mainly because India continues to subsidize purchases by its farmers and that has proved to be a support in the market.
A significant factor that boosted DAP prices in 2007 was China putting a tariff on DAP exports. That tariff remains in place, but should China remove it we will see prices for DAP plummet like urea’s.
Another sign that prices are coming down are comments out of the fertilizer companies themselves. Mosaic says it will cut production to keep prices high. PotashCorp also predicts values will rally back on global demand. They seem to be ignoring the global credit crisis. Also, PotashCorp production has been curtailed by a labour strike at some of its mines that account for almost 30 per cent of its production. Even this shortage is having no impact on the price.
Falling freight rates
Another reason fertilizer prices should come down is that shipping rates have dropped sharply, meaning that even at the same prices for a cargo of fertilizer, the price landed including freight is lower. Ocean freight has fallen 88 per cent since the summer and is at its lowest level in years. Weakness in shipping markets is likely to continue as global trade is slowing and demand for freight has fallen at the same time that there is an increase in shipping capacity, as newly built vessels are coming onto the scene.
So why is your local price likely not lower yet? Well, the fertilizer dealers believed the summertime hype and bought the supplies they are trying to sell you right now at the summer highs. They are trying to maximize their returns and not take a loss on the fertilizer they have for sale.
I was at a farm meeting in Alberta in July and a fertilizer analyst was telling farmers to buy now (in July) because prices were only going up. That proved to be the high of the market and it really looks like spring prices will be significantly lower. This is good news, given the falling values of oilseeds and grains.
There is one piece of bad news for Canadian farmers, as far as fertilizer prices go: that they are priced in U. S. dollars. This means the plunge in the loonie has partially offset the decline in market prices.
Something to be aware of is the fact that the trade wants to see a 2009 canola crop of between nine million and 10 million tonnes. That takes inputs and farmers will simply not seed if canola prices stay at current levels and inputs see a big jump in the spring. Farmers will be in the driver’s seat this 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.