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. 9 mixed, as markets continued to react to global financial instability. Canola edged higher, ignoring weakness in the Chicago soy complex as a steep decline in the Canadian dollar, slow farmer selling and talk of export demand lifted prices. Capping the gains were the record-large canola crop and bearish technical signals. Exporters and crushers were buyers on the week with farmers and speculators as sellers. There was also speculative buying, as funds bought their contracts back at a profit. Western barley posted moderate losses as a large feed grain supply and losses in U. S. corn weighed on values.
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Chicago futures closed the week lower as the economic turmoil sent prices down with index commodity funds liquidating positions. The market ignored friendly news and the U. S. Department of Agriculture’s production and supply reports released on Oct. 10. Soybeans also encountered selling on the strong U. S. dollar.
However, underpinning the soybean market were very slow farmer selling and steady export demand, with China still a solid buyer. U. S. corn futures dropped on bearish technical signals and the lack of a weather threat to the corn crop. However, very strong exports and slow farmer selling gave support.
U. S. wheat futures all saw moderate losses on the global financial problems and the large global wheat supply. However, giving some support were developing weather problems in the Australian wheat crop and a frost which hit the Argentine crop. Export demand for U. S. wheat was also strong.
Money creation
The grain market outlooks have all been lowered in the wake of the financial upheaval. However, demand will remain strong as governments will continue to feed their people. Global grain and oilseed supplies are tight and the world is literally only one crop failure away from major food problems.
You should also be aware that the attempt to stabilize the world financial situation has been achieved by an unrestrained printing of money and the creation of credit. It is thought globally that as much as US$2 trillion to $3 trillion has been created by the world’s governments with nothing to back it up. Ultimately this debases the currency and leads to massive inflation. We should start seeing inflationary support in grains and oilseeds early in 2009. This will help to boost prices. However, it is not likely that this can take us back to the 2008 highs and the outlooks are more muted. A good thing, though, is that input costs have also come down as much as 50 per cent of the level of just 10 weeks ago.
Another thing that needs to be said before we start looking at major crops is that everything points to Canadian production being bigger than the last Statistics Canada production report. As a result my production numbers are a bit higher than the official StatsCan estimates.
The canola outlook has definitely been lowered due to the economic problems and the record-large Canadian canola supply. Canadian production is likely about 11 million tonnes, with some analysts feeling it may be as high as 12 million tonnes. If we use a crop of 11.5 million tonnes, we will have a record-large supply of 13 million tonnes.
Exports look like they will be quite strong, as the pace has picked up recently, and I am looking for exports to be about 5.6 million tonnes, down modestly from 2007-08’s 5.76 million tonnes. Depending on what China ultimately takes (so far estimated at 500,000 tonnes) we may be able to equal last year’s exports. I am looking for total domestic usage to hit five million tonnes. Total consumption then should be about 10.6 million tonnes, which means canola ending stocks for 2008-09 should be about 2.4 million tonnes. Most analysts are carrying a forecast of between two million and 2.5 million tonnes.
This is a burdensome carry-over and will weigh on the market.
USDA’s October supply and demand report was also modestly negative as it forecast U. S. soybean output at 2.983 billion bushels, up from its September estimate of 2.934 billion bushels, as it lowered the average yield by half a bushel, but found an extra 2.2 million acres of soybeans. As a result ending stocks of soybeans were raised to 220 million bushels from 135 million.
What all this suggests for canola prices is that there will likely be more downside and we could see canola futures drop below the $400 level, possibly as low as $350. Values will recover from these lows through the winter and by spring new-crop futures will rise to the $500 level. The need to get canola acres seeded means that canola farm gate bids have to hit the $10-to $11-per-bushel level. Twelve dollars a bushel is a possibility, but only if problems develop in the South American soybean crop.
Flax stocks
Flax supplies will loosen in 2008-09, and with larger crops in other countries the price outlook is not strong. Production will likely come in around 775,000 tonnes, up from 633,500 tonnes last year. Exports are likely to be around 550,000 tonnes, down from last year’s 677,000 tonnes. Domestic use will be about the same as last year at 160,000 tonnes. Total consumption will be 710,000. This should result in an increase in 2008-09 ending stocks to about 235,000 tonnes, up from 2007-08’s 172,000 tonnes. This is not overly tight and prices will reflect this fact.
We are likely to see flax prices drop to the $7.50-$8.50/bu. are a with a rebound to the $9-$10/bu. area after harvest.
Of course, all the forecasts are based on stability returning to the financial markets and that is not a certainty. We are already seeing the global financial problems causing changes in the plantings of winter crops and the South American soybean crop.
Next week we will look at the grains. The Oct. 10 USDA report contains bearish news for them, with higher U. S. corn production and rising ending stocks of both corn and wheat in the U. S.
–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.
