Markets still controlled by “outside” forces

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 WinnipegWinnipeg closed the week ended Nov. 14 moderately lower as weakness in Chicago soybean and soyoil markets weighed on prices. The continued global financial instability also undermined the markets. Farmer selling increased and the market ignored the record pace of canola demand. Western barley futures posted moderate losses as slow demand and the large competing feed grain supply pressured the market down.

Chicago markets were mixed with the soy complex lower and the grains higher. The markets were pressured down by outside forces. Soybeans drew only small support from a very strong demand pace and further delays in the harvest. Corn edged higher on strong demand, the rally in wheat, further rain and snow delays in the harvest and ideas the markets are grossly undervalued.

U. S. wheat futures posted strong gains on the week in all three markets on ideas that U. S. wheat prices are fairly priced and on the reduction in the size of the global wheat crop. The wheat markets are also shifting toward next year’s wheat crop which looks like it will be much smaller.

The U. S. Department of Agriculture brought out its latest supply-demand reports on Nov. 10 and as we suggested, there were only minor revisions in the numbers, with nothing startling enough to send the market above or below the recent range in which prices have been trading.

Fundamentals ignored

The markets continue to be controlled by “outside” market forces and the global financial instability. Largely ignored is the fundamental news about supply-demand balance that normally drives market prices. The grain and oilseed markets have been closely watching the stock markets, crude oil, precious metals, the credit crunch and currencies. Traders do think there are signs that the influence of these forces is becoming less as the speculative component flees the commodity markets.

The credit problems have had very little impact on most grain and oilseed movement out of North America. However, it has had some negative impact in the specialty crop and pulse area as letters of credit from buyers have been rejected by Canadian sellers and their banks. It has led to some specialty crop/ pulse dealers here asking for payment up front, which limits the number of buyers who can meet that criteria.

The credit problems have led to another bearish market impact as Ukraine has become desperate to sell grain, mainly barley. Things have got so bad that Ukrainian sellers are loading ships and then going out to find buyers and taking some very poor prices. This supports my view that the best barley prices this year for a Canadian farmer will be in the domestic market, not the export market.

It does look like wheat has established its lows and has actually bounced back to a firmer tone. Corn and soybean declines have slowed and they also seem to be establishing lows, although the post-harvest bounce has not come yet.

Is worst over?

While a plunge in the global economy to Depression or near-Depression levels would weigh on the markets, the consensus is that the worst is over for grains and oilseeds, with canola down about 50 per cent from its highs. Wheat prices are down 60-70 per cent, corn off 50 per cent and soybeans down 45 per cent.

Traders are noting that the market is totally ignoring some very friendly signals. An overriding sign of the market mood starting to change has occurred in the cash markets, where basis levels for U. S. corn, wheat and soybean crops have seen a sizable increase in the past two weeks as farmers hold onto supplies and demand remains strong.

In canola, farm gate basis levels saw substantial premiums in the first two weeks of November with the best numbers in Alberta. Record export and crush demand for canola forced elevators and crushers to boost their prices. After paying their October bills, farmers locked up the canola bins as farm gate prices dropped as low as $7.50/bu. The premiums got some of the prices back to as high as $9.75, with basis levels that were quite attractive if you only wanted to lock in basis.

Other pieces of news that have been supportive for the markets, but ignored, include a very brisk pace to U. S. soybean exports, with China continuing to be a large buyer. It’s thought the melamine-tainted feed scandal has prompted the exceptionally heavy buying. In fact, the buying has been so strong that total U. S. soybean export commitments are up nine per cent for the 2008-09 crop year, while USDA had been forecasting them to fall 12 per cent.

Meanwhile, China has confirmed that its soybean crop is at least one million tonnes lower than originally thought due to poorer yields. Also supportive for oilseeds, including canola, was the lowering of the Brazilian soybean crop size by USDA to 60 million tonnes from its October forecast of 62.5 million. On top of that, the Argentine soybean crop and plantings are being stressed by drought.

Further positive news for canola came out of Australia, where dry weather has cut its canola crop estimate and will likely result in Australia importing Canadian canola.

Wheat output

The news for wheat is also quite positive, despite the fact that the market has dropped sharply. The Australian wheat crop is now expected to be even smaller than earlier forecasts of around 20 million tonnes. The Grains Council of Australia is pegging the crop at 18 million tonnes. Originally Australia had hoped to see a 25-million-tonne crop.

The Argentine wheat crop is expected to be the smallest of the decade as a result of drought, reduced fertilizer use and low planted area. The trade is forecasting a crop of 9.5 million to 10.5 million tonnes, 42 per cent lower than last year.

USDA’s estimate for a two-million-bushel decline in the amount of wheat used for seed in the U. S. translates into a drop of 1.2 million to 1.6 million U. S. winter wheat acres. This, along with reduced fertilizer use, means U. S. wheat output will be smaller.

All of this supports my view that the wheat outlook is quite strong and the markets will bounce back to the $7/ bu. area for Kansas City wheat once the market starts trading fundamentals again.

Total global grain supplies are at or very near 50-year lows and farmers are being discouraged by prices from planting, so the outlook is quite strong and a price rally is in the cards in the next six months.

USDA data shows that people’s calorie intake holds fairly steady, whether in recessionary times or affluent times. What changes is the source of calories, as less meat and more grains and vegetables are eaten in poorer times. Also be aware in the Great Depression, grain markets started to rally several years before the end of the Depression, leading the overall markets higher.

– 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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