U.S. Debt Crisis, Weather Outlook Pressure Crops

ICE Futures Canada canola contracts bounced around during the week ended July 29, the last week of the 2010- 11 crop year, but managed to post small declines overall amid improving weather conditions and global economic uncertainty. On the year, canola futures are up over $220 per tonne from where they were at the close of the previous crop year, as smaller production combined with solid demand kept values well supported.

While canola spent the first half of the 2010- 11 crop year in a steady uptrend, the outlook heading into the new year is foggy at best, with a number of clouds of uncertainty overhanging the market.

Closest to home, questions on the size of this year’s canola crop will not be answered for some time yet. Many intended acres were unseeded due to excessive moisture in the

spring, but what did get in the ground is generally thought to be beating expectations – so far. Demand will definitely be strong going forward, as Canada’s own domestic crush capacity continues to increase and the global appetite for vegetable oil rises.

The latest numbers from the Canadian Oilseed Processors Association show a total canola crush as of July 27 of just under six million tonnes, far surpassing any previous records.

If production isn’t enough to meet that demand, it stands to reason that canola could have more room to the upside, but values are already historically strong and there are competing oilseeds out there as well.

The other cloud muddying the overall outlook for canola is the mess that is the global economy. It seems every other week another European nation is in need of a bailout, while even the U.S. has found itself on the brink of defaulting on its massive debt. The U.S. debt crisis was at the forefront of the financial markets during the week, and the uncertain situation there has the potential to keep grains and oilseeds on edge until the politicians there come up with a workable solution.

The Canadian dollar has also strengthened considerably over the past year, and most analysts expect it will remain above parity for the foreseeable future.

Barley futures were untraded once again during the week, but are facing their own uncertain future. The likely demise of the Canadian Wheat Board’s single-desk marketing powers over the next year could bring some commercial and speculative activity back to the nearly dead futures, according to some industry participants. However, a renewed interest in the futures markets remains to be seen.

Looking at the U.S. markets, soybeans, corn and wheat all saw some choppy activity during the week, moving lower overall amid the heightened uncertainty regarding the U.S. debt crisis. Soybeans and corn experienced added weakness from improving weather forecasts, and both crops can expect to continue to find some direction from the shifting weather patterns over the next month. The overall story remains the same: U.S. soybean and corn supplies are tight, demand is strong, and the U.S. will need to see good yields to alleviate that tightness.

For wheat, prices began to rise around this time a year ago as concerns over a drought in the former Soviet Union started to pick up steam. That drought kept Russia and Ukraine out of the global wheat market for the better part of a year, opening the door for the U.S. to play a larger role in meeting some of the international demand. A year later, crop prospects are steadily improving in the Black Sea region and the U.S. is no longer the go-to global wheat supplier. Russia has already undercut the U.S. on a number of recent tenders.

The U.S. winter wheat crop is also beating expectations as the harvest moves northward, which means the U.S. could have more winter wheat, but a smaller potential demand going forward. However, spring wheat yields in both Canada and the northern U.S. states remain a question. In 2010-11 tight supplies of high-protein wheat resulted in a wide price spread in the wheat market, and the lack of high-quality carry-over supplies could set the stage for a similar situation in 2011-12.

– Phil Franz-Warkentin and Brent Harder write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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Phil Franz-Warkentin - MarketsFarm

Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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