Your Reading List

USDA Shakes Markets, Highs Likely Behind Us

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

Grain and oi l s e e d prices at ICE Futures Canada in Winnipeg closed the week ended Jan. 15 lower, with canola seeing the biggest slide. Canola was pressured down by the weakness in the Chicago soy complex and bearish technical signals. Buying by exporters and crushers was steady but only appeared as prices fell. Speculators were noted sellers as they now feel the canola market is likely to see moderate to large declines, depending on the price movement in U. S. markets and the size of the South American soybean crops. Western barley was mixed, with nearby futures pushed lower by sluggish demand while deferred contracts

were supported by the tightening supplies of barley.

Chicago soybean and corn futures posted moderate to sharp losses in reaction to the Jan. 12 U. S. Department of Agriculture’s production and supply/demand reports, which found more corn and more soybeans in the U. S. than expected by traders. The result was selling that turned the charts bearish and encouraged heavy speculative selling that sent prices down. Soybeans were also undermined by signs that Chinese buying is cooling down. The drop in the price of corn did attract in some fresh demand, though, both from the livestock industry and the ethanol sector. However, it was not enough to halt the price slide.

U. S. wheat futures saw fairly big declines in all three markets. Prices held up fairly well until the Jan. 12 report, when USDA raised U. S. and global wheat supplies and that pressured the market down. Chart patterns turned bearish and that weighed on prices as well. However, it was not all bearish news for the wheat market and it does look like we may be starting to see a turnaround in wheat.

Regardless, in the short term, this USDA report has taken the bloom off the rose for the market outlook and the highs are behind us for this crop year. The only way things can change for 2009-10 is if weather creates problems for the South American crop.

WHEAT ACRES

The friendliest news in the USDA report came for wheat, where all winter wheat acres came in at 37.097 million, well below trade guesses and below last year’s 43.311 million acres. In fact, this is the lowest winter wheat acreage since 1913 and the lowest on record in many key states.

What this means is that down the road, we will start to see a turnaround in the U. S. and global wheat markets as supply declines. However, before that, the market will have to deal with the fact that the U. S. 2009-10 wheat ending stocks will hit 976 million bushels, well above trade guesses and last year’s 900 million bushels.

Globally, 2009-10 ending stocks were pegged at 195.6 million tonnes, up from the December estimate of 190.9 million.

These numbers suggest wheat prices will initially decline with the corn market, but eventually wheat prices will see a resurgence which should pull wheat futures to solid highs.

THEN THERE’S CORN

The most negative piece of news came for corn, where traders were looking for the report to lower 2009 U. S. corn production because of the delayed harvest and poor weather. USDA actually raised the size of the 2009 crop to 13.151 billion bushels, higher than the highest trade guess and up from December’s 12.92 billion bushels. Some traders feel USDA may lower this in coming reports, as more of the crop is harvested.

The result was higher 2009-10 corn ending stocks at 1.764 billion bushels, up from December’s 1.675 billion. To keep the ending stocks from growing more, USDA raised the demand side, which many traders feel is “fudging” and that ultimately we will see even higher U. S. 2009-10 corn ending stocks.

The feeling is that we will see U. S. corn futures drop back to around US$3.75 per bushel and some feel that US$3.50/bu. is also a possibility. The USDA report also injects greater volatility into the corn market for this spring, with a stronger competition between corn and soybeans for planted area.

While this is bad news for the barley outlook, it does appear to be setting things up for improved profitability for the livestock industry. Barley does look like it will be the poorest of wheat, canola and barley in 2009-10.

Whi le USDA’s numbers were bearish for soybeans, they were not unexpected, as most traders forecast an increase in the size of the U. S. 2009 soybean crop. USDA estimated the crop at 3.361 billion bushels, well above trade guesses and up from the December forecast of 3.319 billion bushels.

USDA forecast 2009-10 U. S. soybean ending stocks at 245 million bushels, actually down from its December estimate of 255 million bushels. The strong export demand, mainly from China, accounted for the drop in ending stocks.

However, globally, USDA pegged ending stocks at 59.8 million tonnes, up from its December estimate of 57.09 million tonnes, due mainly to record production in Brazil and Argentina.

CANOLA PRESSURED

This provides a bearish backdrop to the canola market and suggests we will see lower prices. It certainly supports the view that canola prices are past their highs.

I have been warning about the canola highs being early in the winter, with the markets working lower after that. This is actually earlier than I had anticipated, but I am still looking for the market to drop below C$380 per tonne on the futures and $350 is a much stronger possibility.

However, it is not all bad news for canola, as exports continue to be strong and are virtually unchanged from last year without China doing any major buying in recent weeks.

There has been a slowdown in the crush pace in recent weeks and it will have to be watched to see if it is cutting into everyone’s expectations for a higher crush pace in 2009-10.

While canola will not be able to stage any rally on its own without help from the major oilseed and vegetable oil markets, it can likely hold a stronger premium. Generally, the trade feels farm gate canola prices are likely to hover in the $7.50-$8.50/bu. area with brief moves to $9/ bu. when tightness appears in the cash market.

– 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.

About the author

Comments

explore

Stories from our other publications