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USDA Shocks Markets, But What’s Changed?

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 July 3 mixed. Canola was lower in the old crop as demand slowed and liquidation of July contracts sent prices down. Bearish technical signals weighed on the markets. The decline in the July contract spilled in to pressure the new-crop November levels. The new crop did receive some support from the continued dryness on the western Prairies and slow farmer selling. Demand was sluggish and the gains were small. Weakness in Chicago soyoil weighed on the market. Trade was mainly commercial, although speculators were noted sellers during the week.

Western barley futures posted losses in the wake of decl ines in the U. S. corn market and expectations for reduced livestock in Western Canada. Talk of

large imports of U. S. DDGS, a byproduct of ethanol production, also weighed on the market. Most of the trade was commercial.

Chicago soybean and corn futures ended the week mixed with soybeans higher and corn lower. Soybeans saw moderate gains in the old crop, where China continues to be a strong buyer, with the new crop supported by ideas that soybean supplies in 2009-10 will be tighter than originally expected. Corn futures dropped sharply as the U. S. Department of Agriculture reported much higher-than expected U. S. corn acres in its June 30 acreage report. Favourable growing conditions and improvements in the crop condition also weighed on the corn crop. Giving support was strong export demand, as yet another week saw corn export sales of well over one million tonnes. However, this was unable to overcome the huge speculative selling in corn.

U. S. wheat futures dropped sharply as the advancing U. S. winter wheat harvest, larger U. S. wheat acres and competition from non-U. S. wheat pressured prices in all three U. S. wheat futures lower. Minneapolis spring wheat futures saw the biggest decline as the increased spring wheat acres and better weather for the crop caused the market to lose much of its premium to Kansas City wheat.

USDA’S ACRES

Last week, USDA shocked the markets and altered the price outlooks as it pegged U. S. corn and wheat acres higher than expected while forecasting U. S. soybean acres lower than expected.

The June 30 reports were actually comprised of two parts. The first was a report on the level of grains stocks on June 1; the second was the acreage report. While both had mainly bear ish news for the market, the stocks portion of the report was not overwhelmingly bearish.

The most negative numbers came for corn as USDA pegged U. S. June 1 corn supplies at 4.266 billion bushels, up from 4.028 billion at the same time last year. Traders had been expecting a number around 4.19 billion bushels. This certainly suggests no tightness in

2008-09 ending stocks. We are now likely to come out of the 2008-09 crop year with 1.3 billion to 1.4 billion bushels of corn.

For soybeans, USDA pegged June 1 stocks at 597 million bushels, a bit higher than traders expected, but still down from last June’s 676 million bushels. This suggests 2008-09 U. S. soybean ending stocks at a reasonably tight 130 million bushels.

For wheat, USDA pegged the June 1 stocks at 667 million bushels, well above last June when stocks were 306 million bushels and about in line with trade guesses. This does little to alter the ending stocks forecast.

The major market impact will come from the acreage report, as USDA found more acres of corn and wheat, but also found seven million acres that had been “lost” in its March report.

USDA pegged 2009 corn acres at 87.035 million, up from its March forecast of 84.986 million acres. The trade had expected the acres to be down almost one million acres. But this number is the second-largest planted area since 1946.

Based on this acreage and using trend yields, production would be about 12.3 billion bushels, up from the last USDA estimate of 11.935 billion bushels. However, the closely watched Informa is pegging the 2009 corn crop at 12.52 billion bushels. This would seem to doom corn prices to grovel in the $3-to $3.50-per-bushel area. However, 2009-10 demand for corn is expected to be about 12.5 billion bushels. This suggests corn 2009-10 ending stocks will be about 1.5 billion bushels, if Informa is right. While this will keep corn and barley from rising to the $5/bu. level, it also suggests that prices will trade back to the $4/bu. level after the harvest.

For soybeans, USDA pegged acres at 77.483 million, a new record, up from the March report’s 76.024 million. Traders had expected to see a two-million-acre increase from the March report.

Given trend yields, that would be a crop of about 3.3 billion bushels. Informa is pegging the crop at 3.21 billion bushels. Given that demand will likely be about 3.1 billion bushels, 2009-10 U. S. soybean ending stocks will not be as burdensome as the over 400 million bushels that were originally feared and are more likely to be about 250 million bushels, which means relatively tight stocks.

This will help to keep new-crop U. S. soybeans above the $9/bu. level and will allow canola to move back to the $11-$12/bu. level after it flirts with $9.50/bu. as the summer progresses.

USDA forecast 2009 U. S. wheat acres at 59.775 million, up from the March report of 58.6 million. Higher spr ing wheat and durum acres accounted for the bulk of the increase, although winter wheat acres were also increased.

The numbers are relatively neutral, with production likely to be 2.05 billion bushels, up from the USDA June forecast of 2.016 billion. Informa has the U. S. wheat crop at 2.134 billion bushels.

Should the Informa number prove accurate, 2009-10 demand is expected to be about 2.15 billion bushels which would pull the 2009-10 ending stocks down slightly to 627 million. This will have little impact on prices, except to confirm wheat supplies do not seem to be tight.

With these reports, USDA has shifted the landscape, making the oilseed outlook less bearish, the feed grain outlook more bearish and the wheat outlook relatively unchanged. Weather will still rule the markets through the summer.

– 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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