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Reports Suggest Poorer 2009-10 Price Outlook

For three-times-daily market reports from Don Bousquet and RNI, visit “ICE Futures Canada updates” at www.manitobacooperator.ca

Grain and oilseed prices at ICE Futures Canada in Winnipeg closed the week ended Sept. 11 lower. Canola was undermined by the weak tone in the Chicago soy complex, the advancing harvest, favourable weather and no significant frost threat. Bearish technical signals prompted speculative selling. Giving some support was export demand, with China having bought four to five cargoes of canola recently with Mexico, Dubai and Pakistan also in the market. Farmer selling was slow as producers concentrated on the harvest.

Trade overall was light, with exporters and crushers on the buy side of the market and other commercials and speculators on the sell side. Western barley futures declined modestly

on the advancing harvest and sluggish demand. The lack of farmer selling kept the losses small.

Chicago futures were mixed with soybeans down and corn higher. Soybeans were pressured down by the favourable crop outlook and the lack of a threat from frost. Continued strong demand gave some support. Corn futures posted small gains as slow farmer selling, strong export demand and concerns about the late development of the U. S. corn crop gave support. However, capping the advance was the expectation for a record-large U. S. corn crop.

U. S. wheat futures posted losses as the ample global wheat supply and the lack of fresh export demand for U. S. wheat sent prices down. The advancing spring wheat harvest also weighed on the market.

THIN KNIFE EDGE

Several reports came out last week that suggest the outlook for grains and oilseeds in 2009-10 is poorer. They also suggest that oilseeds in particular are balanced on a thin knife edge that could see the market shoot back to its highs, if weather negatively affects crops in either the U. S. or South America.

The two reports out were the Statistics Canada grain stocks report, which confirmed 2008-09 ending stocks levels for Canadian grains and oilseeds, and the U. S. Department of Agriculture’s September production and supply-demand reports.

USDA pegged the U. S. soybean crop at a record 3.245 billion bushels, up from its August forecast of 3.199 billion bushels. At the same time it forecast demand will be at record levels, with exports at a record 1.28 billion bushels as the U. S. feeds China’s insatiable appetite for soybeans. The result is that ending stocks of U. S. soybeans in 2009-10 were forecast at 220 million bushels, up from the August forecast of 210 million and 2008-09’s 110 million bushels.

Globally, USDA is expecting world soybean ending stocks to hit 50.53 million tonnes in 2009-10, up from 41 million tonnes in 2008-09. To achieve this increase, 2010 production in Brazil has been raised five million tonnes from 2009 to 62 million tonnes, while Argentina is forecast to have a crop of 51 million tonnes, up sharply from the 2009 drought-reduced crop of 32 million tonnes. It pegs global

soybean exports at a record 75 million tonnes. Any slippage in production globally will send the oilseed markets quickly back to their highs.

This then supplies the backdrop for the canola market. The outlook is not as bullish as it was last year, but is still reasonably strong. StatsCan, in its report, pegged 2008-09 canola ending stocks at 1.6 million tonnes, up from the previous year’s 1.46 million tonnes. This level is actually fairly neutral to the market. When the original 2008 crop size was confirmed at a record 12.6 million tonnes, some analysts thought ending stocks would approach three million tonnes.

Traders are revising their production estimates higher for this year’s canola crop because of the good weather we have received so far in September. However, even if the crop is one million tonnes higher than the last StatsCan forecast of 9.5 million tonnes, what we have seen in 2008-09 is that we can consume as much as 13 million tonnes.

Canola will take its cue from the U. S. soy market, but maintain a premium to the soybean market. Crop problems in the U. S. or South America will send canola back up to the $12-per-bushel level. Without those problems, look for canola prices this winter to trade in the $8-$10/bu. level. Harvest lows will likely result in a farm gate price of around $7.75-$8/bu.

USDA pegged the U. S. corn crop at 12.955 billion bushels, up from the August forecast of 12.76 bln bushels. Traders feel this crop will actually be closer to 13.3 billion bushels ultimately, unless frost strikes. However, balancing this off is exceptional demand, with ethanol notably absorbing more of the corn crop in 2008-09 and using over four billion bushels in 2009-10.

The result is that U. S. 2009-10 corn ending stocks are forecast at 1.635 billion bushels, down from the August forecast of 1.695 billion bushels in 2008-09. This is not overly tight, but does underpin the market.

Globally, corn ending stocks are set to fall in 2009-10 due to production problems in China and South Africa. This will keep the global supply of corn tight and stimulate export demand for U. S. corn.

This suggests that U. S. corn prices will stay above the $3/bu. level with winter highs in the $3.50-$3.75/bu. level. However, a big rally in the soybean market or corn production problems due to frost can still quickly send the corn market back to the $4/bu. level.

BARLEY STOCKS

This is a mildly bearish backdrop to barley. However, Statistics Canada shocked the market by reporting that 2008-09 barley ending stocks were 2.84 million tonnes, up from just 1.56 million tonnes in 2007-08 and well above trade forecasts. Lower domestic demand accounted for the rising barley supply.

Offsetting this, to some extent, will be this year’s much smaller barley crop, with StatsCan pegging it at 8.9 million tonnes, while traders feel the crop will likely be about 9.5 million tonnes. If domestic barley demand stays low because of lower livestock numbers and competition from other feeds, mainly dried distillers grains (DDGs), we are likely to see barley supplies remain relatively high in 2009-10 and barley values relatively poor with harvest lows below the $2/bu. level and prices no higher than $3/bu. in the southern Alberta market.

The USDA report had little new to say about wheat, with U. S. ending stocks for 2009-10 at 743 million bushels, up from 2008-09’s 667 million bushels. Globally, wheat ending stocks were increased to 186.61 million tonnes from 183.56 million in August and last year’s 169.5 million tonnes. This will keep wheat prices depressed.

However, falling wheat output, as farmers respond to the price signals and seed less, will help to see the market rebound in 2009-10. One fly in the ointment for wheat is rising talk out of Russia and the EU about using subsidies for wheat and barley sales.

– 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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