Potential For Volatility To Continue Through August – for Aug. 19, 2010

ICE Futures Canada canola futures lost ground during the week ended Aug. 13, retracing back slightly from recent contract highs on improved crop prospects in Western Canada and the subsequent increase in production estimates. Sentiment that recent good weather has increased the size of the Canadian canola crop was noted. Based on early harvest results, market participants are now using a Canadian canola production target closer to 11 million tonnes, compared with earlier ideas of only nine million.

Nearby canola contracts have retraced below both 10-and 20-day moving averages, and trendline chart support draw from the start of the summer rally in June is now under duress.

Canola charts have weakened this past week, but so far are not suggesting an imminent collapse. The loonie remains soft, which will be canola supportive. Weaker outside

market influences in stocks and energy weigh against rally potential in the agriculture sector.

Western barley futures remained unchanged on the week, with no contracts changing hands. October and December barley closed at $168 and $180. Prairie cash bids have firmed recently, but our domestic cash market is lagging behind the rally in the feed barley export market and will likely continue to do so until the Canadian Wheat Board picks up the pace on the 2010-11 export program.

Current international prices suggest the equivalent elevator returns of at least $3.50 a bushel and as high as $4/bu. at some Prairie locations if they were captured today. We hope the Canadian Wheat Board is acting aggressively on these opportunities.

Meanwhile, cash bids in Saskatchewan have increased gradually over the past month and are now as high as $2.80/bu. in the central part of the province. In southern Alberta’s Feedlot Alley, bids range from $3.50 to $3.55/ bu. Edmonton-to-Wainwright corridor feedlots are now bidding about $3.20 to $3.30/bu.

Chicago soybean futures slipped slightly mid-week but continued to maintain an upward price with a bounce back higher to close the week ended Aug. 13.

Data from the Aug. 12 U. S. Department of Agriculture report pegged 2010 U. S. average soybean yield at 44 bushels per acre, slightly higher than expected, with production now projected at a record-large 3.433 billion bushels. However, heightened demand expectations in the coming year, particularly from China, are expected to offset the supply forecast. Extremely robust new-crop U. S. export sales of soybeans reflect the mounting concern by world importers that any shortfall in 2011 South American production will significantly tighten world supplies. Concerns that the U. S. soybean harvest is still vulnerable to late-season weather threats left traders hesitant to embrace record yields projected in August.

Chartwise, November soybeans have support at US$10.20/bu., with overhead resistance at $10.50. The mild mid-week setback in futures managed a turn back upward to close the week, maintaining technical support along the upward trendline drawn back to the beginning of July.

Chicago corn futures also eased mid-week, but managed to end with modest gains. USDA pegged the U. S. corn crop slightly above expectations this past week with a national average 165 bu./ac. yield and record-large production potential at 13.365 billion bushels. Normally, a large crop will get larger and statistically we could see average crop yield rise further, to 167 bu./ac. But many traders expect this crop will get smaller going forward as nitrogen loss and hot weather in the south trim yields. Strong export demand and a wave of speculative fund buying renewed strength in corn to close the week as of Aug. 13. Bullish leadership from the wheat markets also provided upward momentum to finish the week.

Chartwise, December corn should find support at $4.10/bu., with overhead resistance at $4.30.

RUSSIA’S GAME CHANGER

U. S. wheat markets ended this week (Aug. 13) well back from the speculative-powered highs posted last week, but appear to have regained their collective footing. USDA report data released Thursday (Aug. 12) fully anticipated revisions lower to 2010 production in drought-troubled Russia, Ukraine and Kazakhstan, but the bullish surprise still came in the size of the change. For the entire FSU-12 complex, which includes those countries, USDA dropped its production estimate from 100.62 million to 87.21 million tonnes in one month. Russia’s production alone is now 27 per cent smaller than last year.

U. S. estimates of global output in this report undercut previous predictions, now forecasting 2010-11 global wheat output at 645.73 million tonnes. That was lower than expectations and below recent estimates from the Food and Agriculture Organization and International Grains Council, which both saw the crop at 651 million tonnes. This is a surprising move from USDA, which is traditionally more cautious in its crop adjustments.

Wheat production forecasts have been slashed repeatedly since the middle of the summer, when the severity of record-setting heat and drought in the former Soviet Union became apparent. Wheat prices hit nearly two-year highs on Aug. 5 as Russia banned grain exports because of the drought, but prices have pulled back since then. Still, wheat prices are up about 60 per cent over the past two months.

Adding to the bullish fervour, Ukraine’s state customs service on Aug. 12 said it had blocked the export of more than 28,500 tonnes of wheat on two boats due to incorrect paperwork. Unlike Russia, Ukraine, also a big wheat exporter, hasn’t put an official ban in place, but some analysts say government officials there are using bureaucratic means to slow down shipments overseas. After announcing its export ban, Russia asked Belarus and Kazakhstan, its partners in a recently formed customs union, to halt grain exports, fearing that Russian grain would be exported via the two countries.

The Russian drought has changed the landscape of agriculture for the next 18 months at least. There will be plenty of volatility in the months to come. Corn and soybean markets remain followers of emerging developments in the wheat market.

But there remains some element of caution in the trader mindset, recognizing that despite the lowered wheat production estimates, the world still holds its second-largest supply of wheat inventory (carry-in plus production) since 2000 and record-large U. S. spring wheat, corn and soybean yields. Nonetheless, the potential for extreme price volatility will persist easily into early September.

– Mike Jubinville is a grain market analyst with ProFarmer Canada in Winnipeg and

writes for Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.

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Forthree-times-dailymarket reportsfromResourceNews International,visitICEFutures Canadaupdates”at www.manitobacooperator.ca.

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