Old-Crop Oilseeds Still Look Good, $10 Canola Uncertain

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 March 13 mixed, with canola down and Western barley higher. Canola was pressured down by a slower pace to demand and the fact that recent premiums in the country have attracted enough canola to start to soften the cash market tightness. Losses were greatest in the old crop. Trade was quiet, with many market participants away in Toronto at the annual Canola Council of Canada convention. Western barley rallied on strong gains in U. S. corn and the lack of farmer selling.

Chicago soybean and corn markets rallied, with much of the strength tied to the bounce higher in the stock market and gains in crude oil. Soybean advances were small, with strong export demand giving some support. Limiting the upside was the expectation for large U. S. soybean acres. Chicago corn futures posted strong gains on a very strong export pace and ideas that corn acres will be down. Ethanol profitability also encouraged firmness.

U. S. wheat futures were modestly lower in all three markets, as the sluggish export pace and rising global and U. S. wheat ending stocks sent the market down. However, the losses were limited by the gains in corn and soybeans.

The U. S. Department of Agriculture brought out its latest supply-demand balance sheets last week and suggested that the market still has some upside in it for old-crop oilseeds and that the corn market is improving.

CHINESE DEMAND

USDA turned the oilseed outlook for the old crop bullish as it raised the export forecast for the soybean crop and lowered the U. S. 2008-09 soybean ending stocks estimate to 185 million bushels, from its last forecast of 210 million tonnes. This is below the critical 200-million-bushel level and suggests we will see the $9.50-$10/bu. level this spring, as the market will need to ration supply. China continues to be a strong market and caught traders by surprise this past week as it took almost half a million tonnes of U. S. soybeans. The pace of Chinese soybean demand has some traders looking for the U. S. soybean ending stocks to drop as low as 165 million bushels, which is very bullish for the old crop.

This will give some support to the canola market, but will be balanced off by the fact that in the same report USDA raised the soyoil 2008-09 ending stocks to 2.778 billion pounds, up from February’s 2.243 billion. Lower usage of soyoil for biodiesel accounted for much of the increase. As canola follows soyoil closer than soybeans, the increased soyoil supplies will limit the ability of the canola market to rally in April/May.

How high canola prices will climb this spring will be entirely dependent on Chinese demand for canola. It has slowed somewhat and that has many traders very cautious about export forecasts. If we see China make another buying foray into canola, then $10/bu. canola is more likely.

The longer-term U. S. soybean and Canadian canola markets remain mildly bearish, with 2009-10 prices likely to be pressured down by large U. S. soybean and Canadian canola acres, unless Mother Nature interferes.

Agriculture and Agri-Food Canada’s forecast for a record 17.235 million acres of canola has been largely greeted with skepticism by traders, although they concede canola acres will remain strong. Closely watched Informa Economics is estimating U. S. 2009 soybean acres at 81.5 million, up from 2008’s 75.7 million.

USDA pegged U. S. 2008-09 corn ending stocks at 1.74 billion bushels, down from its previous estimate of 1.79 billion bushels. The decline reflected an unexpected increase of 50 million bushels in corn demand for ethanol use. This should push corn back to the US$4/bu. level in old-crop futures, and maybe above.

LOW ACRES

The new crop could actually be quite strong for corn and ultimately for barley as both crops are expected to see disappointingly low acres. A U. S. national crop insurance rate of US$8.80/ bu. for soybeans and $4.04 for corn supports the view that U. S. soybean acres will rise and that U. S. corn acres will fall. Informa forecasts 2009 U. S. corn acres at 81.4 million, down from last year’s 86 million acres.

This looks like it is setting up the feed grain markets for a nice 2009-10 rally as corn ending stocks will drop back to very tight levels. AAFC’s forecast for Canadian barley acres at 9.35 million, unchanged from last year, are supported by the trade. Some feel barley acres could even drop lower.

What will limit the upside in barley, though, will be the use of dried distillers grains in livestock rations. However, we should see barley back to the $3-$4/bu. level in the late fall or early winter.

The most bearish of all the USDA reports was for wheat, as the 2008-09 ending stocks were forecast at 712 million bushels, up from the February estimate of 655 million bushels, due mainly to reduced demand for wheat as food.

This caught much of the trade by surprise and pressured the wheat market back down, although Chicago wheat was not able to penetrate the support at US$5/bu. on the futures.

Globally, USDA raised the world wheat 2008-09 ending stocks to 155.85 million tonnes from 149.96 million, due to higher production in several countries and lower demand.

However, the market is now looking forward to 2009 acres, which we know will be down globally. On top of that, there are some weather problems developing in key wheat-producing areas. The Great Plains in the U. S. need significant rainfall by the middle of April. Australian wheat areas are once again seeing the development of a dry zone. The Chinese winter wheat crop will be down because of drought.

These reports support my view that we will not drop back to the dismal prices of 2005-06 and that 2009-10 should be a profitable year, though not as profitable as recent years.

– 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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