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U. S. Creates Over $1 Trillion, Sends Markets Higher

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 c losed the week ended March 20 higher, with strength in the Chicago markets giving good support to prices. Canola was boosted by a disciplined slow approach to farmer selling, talk of Chinese export interest and bullish technical signals that triggered strong levels of speculative buying. The advance was restrained by a move in the Canadian dollar to five-week highs, the lack of any confirmed export sales to China and increased farmer selling as the week advanced. Trade was moderate to heavy in canola, but remained light in barley. Western barley also rallied, reflecting the gyrations in the cash market, where Lethbridge prices have firmed to the $160-per-tonne level as farmer selling has slowed. The firm tone in the Chicago corn market was only a minor supporting factor in the barley market.

Chicago corn and soybean futures rallied in a week when there was little news in the grain markets to really justify an advance. The move by the U. S. Federal Reserve to loosen credit accounted for much of the support during the week, which sent soybeans solidly above the US$9-per-bushel level and corn to the US$4/bu. level. Soybeans received some added support from growing tensions between Argentine farmers and their government over an export sales tax. It’s felt the tension will result in reduced Argentine soybean exports. Capping the soybean advance was sluggish fresh export activity and expectations for large U. S. soybean acres. U. S. corn received an added boost from expectations for increased ethanol use in U. S. fuel. However, the lack of fresh news and sluggish corn exports this week did weigh on values.

U. S. wheat futures rallied sharply during the week. The Federal Reserve move to stimulate the U. S. economy gave some support. However, the market was also supported by dryness concerns for the U. S. winter wheat crop and ideas that flooding in North Dakota could reduce acreage by over one million acres.

GREENBACK’S BIGGEST DECLINE

The big news this week, though, all concentrated on the U. S. Federal Reserve’s move to stimulate the U. S. economy by creating over US$1 trillion. The Fed hopes the move will spur inflation, halt any deflationary pressures and weaken the U. S. dollar. The move was a boon to commodity markets, which all rallied sharply in the days following the announcement, as the U. S. dollar saw its biggest one-day decline on record.

The reason for the commodity rally was a hoped-for resurgence in the economy, which should create demand and also create inflation, which always pushes commodity prices higher.

The move is not without its critics, and its ultimate impact is not a sure thing. The theory behind the move is that it should cause credit to start flowing again, causing people to buy and companies to reopen factories to meet the new demand. The flaw, say critics, is that the cure for the economic malaise is people and companies taking on more debt, which was the problem that caused the market collapse in the first place.

Indeed, the Fed move has added a massive amount to the U. S. debt and the creation of the money has caused the U. S. dollar to fall. The U. S. now wants to shift that government debt to companies and individuals, as those individuals take on debt to buy things. There are no guarantees this will happen.

The impacts on grain and oilseeds markets are likely to be short-lived and by week’s end, we were already seeing ideas that the impact was fading, as far as grains go.

Longer term, though, the move could lead to massive inflation, which would boost grain and oilseed prices. However, farmers are no further ahead in this inflationary environment, as their costs for inputs also escalate and eat up all the increase in prices.

The critics of the program also point out that Japan tried this to get its economy out of a malaise in the 1990s and it was not successful.

Economists generally agree that we will know by October if this plan has worked to stimulate the economy. If it fails, there will likely be negative repercussions for the grain and oilseed markets as demand may be negatively impacted.

ACREAGE ESTIMATES

The discussion about planted area in the U. S. and Canada is heating up again. In the U. S., the consensus is that corn acres are going to fall and soybean acres going to increase. Most agree that soybean acres will rise to a record-high level of about 80 million this year and this will send ending stocks up to burdensome levels well over 400 million bushels, even if China has an aggressive import program.

This is bad news for canola. Canola acres are likely to remain quite high, but not at record levels, and I expect yields to return to more normal levels. The result should be only mildly burdensome ending stocks levels for canola.

U. S. corn planting is expected to drop to 83 million to 85 million acres from 86 million in 2008. There is some dispute here as corn seed sales are running ahead of last year. However, at 84 million acres, with trend yields and demand of 12.5 billion bushels, 2009-10 corn ending stocks will drop back to the one-billion-bushel level, which supports higher prices. In fact the expectation is that we might see US$5/bu. corn by next winter.

This will be supportive for barley. The grain trade indicates western Canadian barley acres will now likely be down 10-20 per cent from last year as farmers are very disappointed at the poor performance of barley relative to the rest of the market in 2008-09.

Should this prove true, we will see 2009-10 barley ending stocks drop below the two-million-tonne level and possibly be as low as 1.5 million tonnes. This would definitely take us back to the $4/bu. level next winter and perhaps even higher.

The wheat markets continue to look reasonably strong for 2009-10 as crop problems and lower acres globally will boost prices. Competition from the Black Sea region looks like it will not be as aggressive in 2009-10, as its output is smaller, due to lower acres and reduced input usage. North Dakota spring wheat acreage is expected to be cut by flooding and that should add up to better prices for western Canadian spr ing wheat, as well.

– 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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