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New market lows, as crops are huge

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 future s at ICE Futures Canada in Winnipeg closed the week ended Dec. 5 lower, with fresh contract lows appearing in both barley and canola. Canola was pressured down by weakness in the Chicago soy complex, a record-large canola crop and bearish technical signals as prices dropped below the significant $400 level. However, giving some support was a steep decline in the Canadian dollar and a continued record demand pace. Trade was moderate and commercially dominated, although there was some speculative selling in the market. Farmer selling was steady. Western barley ended the week moderately lower, as losses in U. S. corn, a large Canadian barley crop and steady farmer pricing weighed on values. Trade was commercially dominated.

Chicago soybean and corn futures also fell sharply, penetrating the significant $3.50-per-bushel level in corn and the $8/bu. level in soybeans during the week, as the market hit fresh contract lows. The continued economic turmoil and weakness in outside markets cast a pall over grains and soybeans as the rallying U. S. dollar also weighed on the market. Soybeans declined as rain appeared to help out some of the dry soybean-producing areas of South America while export and crush demand slowed. Bearish technical signals stimulated speculative selling. However, giving some support was the lack of farmer selling. Corn futures dropped moderately on a slow pace to export demand and on competition from cheap feed wheat. However, cash markets were firm as farmers sat on their supplies.

U. S. wheat futures fell sharply at all three U. S. wheat futures markets. The losses in corn and soybeans did weigh on wheat values. A sluggish export pace and favourable conditions for the U. S. winter wheat crop also pressured prices down. There was little really fresh news in this market.

Shocked by StatsCan

Statistics Canada brought out its latest crop production estimates and shocked farmers and the grain trade with the large size of the crop. It seems less-than-ideal weather had little impact on production. Even significant production problems in the Interlake of Manitoba, the Peace River country of Alberta and a prime growing area east of Edmonton had little impact on the final crop size.

The most shocking number came for canola, as StatsCan pegged the crop at a record 12.642 million tonnes, up from its September estimate of 10.887 million tonnes and last year’s 9.529 million tonnes.

This means supply this year will be a whopping 14.18 million tonnes. With consumption set to be about 10.6 million tonnes, canola supplies at the end of the crop year will be about 3.5 million tonnes, which is a new record.

This is already pushing canola prices down and the farm gate prices have dropped below $8/bu. in many areas. In most areas, $8/bu. is break-even for producers. However, the trade now has a problem. Consumpt ion of canola next year is expected to increase to about 11.5 million tonnes, as increased crushing capacity demands more canola.

The poorer prices, higher input costs and greater risk growing canola will likely mean that canola acres are going to drop in 2009. In 2008, seeded area was 16.159 million acres. If farm gate prices remain at these levels, it’s likely that canola area would drop to the 15 million-acre level. With average yields the crop would be about 10 million tonnes.

Canola rally needed

This would be a total supply of 13.5 million tonnes for the 2009-10 crop year. If consumption hits 11.5 million tonnes as expected, then ending stocks will drop to two million tonnes, which is 17 per cent of usage, which is not burdensome. If there’s a threat that canola area would drop further than the 15 million-acre level, then the industry will be in trouble.

As a result, I still maintain this spring there will be a canola rally in order to attract in seeding. Assuming that the global financial system can return to some kind of normalcy, I can see canola farm gate bids between $9 and $10/bu. for the 2009-10 crop year contracts. The record strong pace of usage for the cur rent 2008-09 crop year will help to bring canola futures back to the $8-$9/bu. level after the current weakness fades.

Burdensome barley

StatsCan pegged barley output at 11.781 million tonnes, up from its estimate of 11.219 million in Sept and last year’s 10.98 million tonnes. This makes for a total available barley supply for 2008-09 of 13.3 million tonnes. I am looking for consumption to be about 10.5-11 million tonnes, as feedlots have returned to full barley rations. This would put ending stocks at 2.3-2.8 million tonnes, which is burdensome and suggests weaker barley values. Farm gate prices will likely fall in a $2-$3.50 range, with $4/bu. likely to be the high in Alberta. Domestic barley prices will be higher than the export market.

StatsCan forecast the 2008 wheat crop at 28.611 million tonnes, up from its September estimate of 27.266 million tonnes and last year’s 20.054 million tonnes. This will be a total wheat supply of 33.4 million tonnes.

I had been looking for higher exports in 2008-09, but to date exports are lagging. Everything suggests exports will still outstrip last year, so for the time being, I will hold my total-use estimate at 25.9 million tonnes, up from 22.064 million last year. This would leave ending stocks in 2008-09 at 7.5 million tonnes, up from 4.816 million tonnes. Much of this will be durum, though, and I still feel non-durum spring wheat ending stocks will be reasonable and not burdensome.

However, the international market sets price and right now the market is reacting to a record-large crop and not the fact that ending supplies are the fourth tightest level in 20 years. I still feel wheat prices will bounce back once global financial problems are stabilized. Longer-term, the wheat outlook is actually quite friendly.

Next week I will look at flax, oats and durum. It is also time to revisit the fertilizer question – buy now or later? – as there have been interesting developments in the past two weeks, as retail dealers have finally started to bring retail prices down in line with the wholesale market.

– 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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