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Grain Markets Turning Friendly Despite Flu

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 May 1 higher, with gains in the U. S. markets giving a boost to Winnipeg prices. The gains, however, were offset by a rally in the Canadian dollar to four-month highs against the U. S. greenback.

Canola saw very small gains, lifted by speculative buying. Commodity funds were reacting to a technical signal that in the past has proven highly accurate at suggesting the market would see a rally. Continued strong crush margins also gave support. Farm gate prices rallied to and above $10 per bushel in Saskatchewan and Alberta and that attracted in heavier farmer selling. Also restraining the gains were lacklustre fresh bookings of canola, which slowed exporter pricing.

China seems to have backed away from the market, with many traders citing the strong Canadian dollar as one of the reasons.

Western barley was firm in very light trade. There was little interest in the market and the market rallied on the general stronger tone in grain markets and the slow pace to farmer selling.

Chicago corn and soybean futures posted a solid rally during the week. Soybeans were lifted by the tightness in the old crop. The latest estimates for the Argentine soybean crop were lowered and that gave support, as did strong export demand with China continuing to be a strong buyer. The old-crop rally pulled up the new crop, but new-crop gains were muted by the delays in planting the U. S. corn crop, which many feel will result in higher soybean acres. Corn futures advanced sharply as rain delayed the corn planting and export demand remained brisk. The move up came in both the old and new crops. Weather forecasters called for rain to hamper corn seeding through the first week of May.

U. S. wheat futures also rallied sharply, with the market supported by weather problems. The frost that hit the winter wheat crop in early March on the southern Plains caused some buying early in the week, with heavier-than-needed moisture by the end of the week helping to boost values. In addition, the cool, wet conditions on the northern Plains were hampering seeding of the spring wheat crop. The resulting gains turned chart patterns friendly and that triggered huge commodity fund buying. They were buying back their futures contracts as they had bet on wheat prices falling and the rally was costing them money.

VIRAL MARKETING

During the week, the market encountered a brief drop on the swine flu threat as traders feared lower pork consumption and a cull of hogs would result in lower demand for feed grains. However, the threat was very short-lived and by mid-week it was fading as a market force in the grain market.

Agriculture and Agri-Food Canada brought out its revised

2009-10 supply-demand reports last week following the April 24 Statistics Canada seeding intentions report. The numbers suggest prices should be reasonably strong this year.

For canola, AAFC pegged the 2009 crop at 10.15 million tonnes and usage at 12.35 million tonnes. The result was 2009-10 ending stocks dropping to a very tight 650,000 tonnes from 2.6 million in 2008-09. This seems reasonable and suggests that old-crop canola values do not have as much downside in them as I first thought. However, if weather is supportive for the crops in North America, I do still think we will see canola cash bids hit the $8.50-$9/bu. level before the rally begins, unless U. S. soy markets see an unusual spring rally.

However, longer term, I do expect canola to top $10/bu. and there is a strong chance it will reach $11/bu., depending on two main factors. The strength of the Canadian dollar could be a depressing influence. It has hit four-month highs and looks like it might want to go to US85 cents.

STRENGTH IN OILS

The other factor that has to be watched is international vegetable oil and oilseed output. South American soybean production will likely be higher in 2009-10 as the Argentine crop returns to more normal production levels. This will offset the fact that the Brazilian crop looks like it will be smaller in 2010 as farmers are having trouble getting credit for inputs.

However, with global vegetable oil and soybean supplies as tight as they are the downside in the market is limited and the canola outlook is turning quite strong.

For barley, AAFC expects the crop to be 10.8 million tonnes, usage to equal 10.9 million tonnes and ending stocks to be two million tonnes. This is reasonable and suggests barley markets will not be depressed in 2009-10. With the U. S. corn market looking bullish, the barley outlook is quite strong. In fact, I’m looking for barley to return to the $3-$4/bu. level next fall and early winter, up from current values that are mostly around the $2.50/bu. level. Barley at $2.50/bu. is obviously undervalued when corn is US$4/bu.

AAFC pegged Canadian wheat production at 25.9 million tonnes with usage at 26.2 million tonnes. The result will be ending stocks falling to 6.4 million tonnes. However a big part of the ending stocks will be durum at 2.1 million tonnes.

The International Grains Council, in its monthly supply-demand report this week, forecast that global 2009-10 wheat ending stocks would be 171 million tonnes, up from this year’s 162 million tonnes. I feel the IGC is optimistic about production at 651 million tonnes. The strength in global wheat prices also suggests that the IGC is a bit high.

However, even if the IGC is accurate and overall wheat stocks increase, the supply of high-quality wheat will be very tight this year and Canadian wheat growers should have a good year financially, although nothing like the $12/bu. we have seen recently.

The AAFC numbers had no friendly news for oats, which is trading below $2/bu. in most of Western Canada. It pegged production at 3.4 million tonnes and consumption at 3.7 million tonnes. This might prove a bit optimistic. If accurate, 2009-10 ending stocks would drop to 900,000 tonnes which is still on the burdensome side. The friendliest news for oats is the fact that the corn outlook is so strong. This would normally pull oats up, but it certainly hasn’t in 2008-09. I could see oats back to the $2.50/ bu. area this fall and back to $3/bu. only if there is a major problem with U. S. corn or Canadian oats production.

– 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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