Is The Wheat Rally Real?

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

Grain and oi l seed prices at ICE Futures Canada in Winnipeg closed the week ended May 29 lower. Canola was pressured down by the big surge in the Canadian dollar. Newcrop canola did not see as big a decline as the old crop on production uncertainties and expected record demand. Eroding crush margins and the lack of fresh export sales contributed to the decline in the old crop, as did improved weather for the new crop. Talk that canola acreage could be higher than Statistics Canada’s report also weighed on values. Routine crusher and exporter buying met elevator company and commercial selling. Profit-taking by speculators also appeared as prices fell. Technical signals turned bearish.

Western barley edged lower despite gains in U. S. corn

and ideas that barley acres could slip as farmers plant more canola. Trade was dominated by commercial selling as they were liquidating their futures contracts and that accounted for the modest decline. Unaggressive end-user buying was noted. The rising dollar also weighed on the market as it makes U. S. corn cheaper.

Chicago corn and soybean markets were mainly higher as the plunging U. S. dollar gave support. Soybeans saw smaller gains in the old crop but bigger gains in the new crop. Soybeans drew some support from the tight old-crop supplies, but export demand is slowing, which weighed on prices and, as the week went on, speculative commodity funds started to take profits as they feel the rally may be coming to a close. The inability of the July contract to close above $12 a bushel prompted their concern. New-crop soybeans rallied on the continued rain delays in planting the soybean crop and the better weather for planting the corn crop, which will limit the number of acres shifting into soybeans from corn. Exporters, crushers and speculators were all buying in the new crop with some farmer selling noted.

Corn futures rallied as the crude oil market staged a strong rally. A continued strong export pace, even at these prices, gave support as did the production uncertainties caused by the delayed planting of the corn crop. Commercials and speculators were the main buyers while farmers were noted sellers.

WHEAT ADVANCES

U. S. wheat futures posted strong gains on concerns about the U. S. winter wheat crop and the delays in planting the U. S. spring wheat crop. Talk that as many as one million spring wheat acres will not be planted, due to the weather and flood-induced delays, helped to boost prices. The rising market turned charts bullish and that triggered huge speculative commodity fund buying, which caused the market to soar. The falling U. S. dollar contributed to the gains. Capping the advance were a sluggish pace to export demand and ideas that global wheat supplies are adequate.

Canola turned lower this week and is unlikely to return to its highs without some problems developing in the U. S. soybean or

Canadian canola crops. China reported that it had a record canola crop, eclipsing its 2004 record of 13.1 million tonnes. However, it did not come out with a number and it is notorious for “fudging” on its estimates or being downright wrong. Given the weather problems for the Chinese crop this year, a record crop is questionable.

However, the downside in canola is limited as old-crop supplies will be tighter than expected. There is talk that canola acres will be a million acres higher than the last StatsCan forecast of 14.999 million. An acreage of about 16 million, close to last year’s record of 16.159 million acres, would not likely yield last year’s record crop of 12.6 million tonnes. Record yields are not expected and production would likely be around 11 million to 11.5 million tonnes.

As mentioned last week, consumption in 2009-10 will be a record and the extra supply will simply be absorbed by crushers and exporters. The outlook is still very strong for the canola market through 2009-10.

WHEAT PROS TENTATIVE

On May 28, the Canadian Wheat Board brought out its latest pool return outlooks (PROs) for 2009-10 and raised wheat prices by a very tentative $2 per tonne from their April forecast. This came as Minneapolis new-crop spring wheat futures rose US$1.25/ bu. during May, while Kansas City new-crop wheat futures climbed a little more than $1/bu. Adjusted for currency fluctuations you would have expected the CWB prices to be up $25 per tonne. Is the CWB wrong or just being conservative?

There are good reasons for the current rally in the market. The yield and quality problems that are showing up in the U. S. winter wheat crop, combined with the weather/flood-induced reduction in the spring wheat crop, are behind some of this rally. Also supporting the rally are the dryness concerns in Argentina, which will reduce production, some say to the point where it will not be exporting wheat. Weather is also a problem for the southeastern European wheat crop.

Also being built into the wheat market is the likelihood of an El Nińo current in the South Pacific Ocean, which raises the chances that the drought that has decimated the Australian wheat crop over the past few years will continue. Feed wheat demand is expected to increase as the smaller U. S. corn crop will result in greater consumption of wheat in livestock rations.

All this news lifted the wheat market enough to turn chart patterns bullish and that triggered massive commodity fund speculative buying, which sent the wheat markets to their highs.

Balancing that off is the fact that other countries, including the Black Sea zone, are having a reasonably good crop. The International Grains Council forecasts the 2009-10 wheat crop at 652 million tonnes, down from this year’s 687-million-tonne crop, due mainly to lower acres. The IGC has not yet factored in the crop problems that are appearing, as the situation can still change. Consumption is expected to be 643 million tonnes, which means ending stocks in 2009-10 will actually increase to 167 million tonnes from 158 million tonnes in 2008-09.

The CWB forecast reflects that fact and the uncertainty about the Canadian dollar, which is now expected to go to parity. Also, much of the rally so far is purely speculative. As a result, the CWB forecast, in my opinion, is justifiably conservative… perhaps a bit more than I would have been.

However, as the year progresses and we get a better handle on 2009 wheat production, the current market surge to the $8/bu. level in Minneapolis wheat may prove to be only the beginning of what will be another major wheat rally. At worst, wheat values will not drop below $7/bu.

– 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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