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Grain and oilseed prices at the ICE Canada futures market are lower since my last column with big declines in canola. It was undermined by weakness in the Chicago soy complex, the beginning of the harvest, favourable weather and slow demand. Farmer selling picked up as well. There was some talk of exports going to China or Pakistan as canola was competitive with the European rapeseed crop price. Western barley posted small losses on the weak tone in corn and a soft tone in the cash market.
Chicago soybean and corn futures posted losses with big declines in the soybean market on the favourable crop outlook and beneficial weather. However, exports were also strong. Corn futures declined on expectations for a large crop and the favourable growing conditions. Concern about the lagging development and strong exports did give some support.
U.S. wheat futures fell moderately on the ample global wheat supply and the advancing North American spring wheat harvest.
U.S. wheat demand did pick up in the export market, suggesting the market was attracting in buying. Reduced Australian wheat crop estimates due to El Nińo also gave some support.
Across the entire Canadian and U.S. markets bearish technical signals prompted strong levels of speculative selling. Funds are short canola again.
Note that the stars seem to be aligning to suggest a very poor year for canola and soybeans in 2010-11. I know that most farmers don’t have their 2009 crop off yet, but for marketing purposes it is best to note that early pricing will likely be better than waiting until the spring.
SOUTH AMERICAN BIN BUSTER
The main reason for the poorer outlook is that fact that soybean production looks ready to explode. South American production is expected to climb to record levels with Brazilian farmers quite optimistic. Talk is that Brazilian output will climb to 64.7 mln tonnes from this past year’s 58.1 mln tonnes. The entire South American region could produce as much as 120 mln tonnes, which would be a new record. Weather tends to be good for South America in a year that El Nińo appears.
Even if record demand continues for soybeans, global ending stocks will climb in 2010. This will weigh on the market in the spring and suggests that canola and soybean prices will be stronger early this winter than in the spring.
Weather can still alter this outlook, but if growing conditions are favourable the outlook for oilseed gets quite poor. El Nińo is a mixed blessing for oilseed prices as it gives good weather to the South American crop, boosting its production, but tends to cut output of palm oil. The result is that the bearishness of the large global soybean crop is offset. In addition, if soybean prices fall to $8/bu this spring it will sharply reduce 2010 U.S. plantings which means we will not stay at the spring lows for too long.
BARLEY CROP DOWN, BUT…
Everything suggests that barley should be very strong this year as production has dropped sharply from last year’s 11.78 mln tonnes. Stats Canada is pegging the 2009 crop at 8.948 mln tonnes.
Grain trade sources are revising their barley forecasts higher as yields are coming in better in early harvesting. Most are carrying a barley crop of about 9.5 mln tonnes.
The current low prices are expected to stimulate demand, not in the domestic market as you would expect, but in the export market. Current f.o.b. prices for barley out of Vancouver are competitive with Black Sea f.o.b. barley prices. Sales are not likely into the largest markets for barley in the Middle East, because of distance, but are likely into Asia.
However, domestic demand is falling due to the importing of competing feed supplies from the U.S., mainly distillers dried grains both with and without solubles. It is felt that feedlots have heavily booked these DDGs and are covered out to January. The U.S. ethanol plants are running full steam and there is a lot of the DDGs available for sale. Canada will be the main importer of U.S. product. That is on top of the increasingly large Canadian supply of DDGs.
Domestic barley demand could be as low as 6.5 mln tonnes as DDGs flood the Prairies and livestock numbers decline due to poor profitability.
If exports climb to 2.8 mln tonnes and domestic use is 6.5 mln tonnes, then total barley consumption in 2009-10 will be 9.3 mln tonnes which is about in line with production, and ending stocks of barley will drop only modestly to about 1.8 mln tonnes from the expected 2.1 mln tonnes in 2008-09.
This suggests at least firm markets, but prices have already dropped $20/tonne in the domestic market over the past few weeks as the lower demand in Western Canada and falling U.S. corn markets weigh on values.
WATCH PROS FOR BARLEY
U.S. corn production is forecast by Informa Economics at 13.372 bln bushels, up from the USDA forecast of 12.76 mln tonnes. Most traders are comfortable with this, if no frost hits the crop.
This will keep U.S. corn prices down around the US$3/ bu level unless unusual demand comes forward. We are already seeing exceptional demand for corn in the export market. Ethanol producers are running at full capacity as they are profitable and will continue to be as long as crude oil values stay above $60/ barrel. In addition a shortage of sugar in the world, due to the problems with India’s monsoon, has stimulated demand for corn syrup as a sweetener.
So the large crop will likely be absorbed. In addition the market fears farmers turning away from corn planting next year if prices are too low and that likely will hold U.S. corn values at the $3/bu level. So corn supplies a price floor for the barley market, but does not give it much encouragement to rally.
As a result barley prices as the harvest progresses are likely to drop back to the $135 level in the southern Alberta market, down from the current $145-$150, before bouncing back. We could see Manitoba prices drop to the $2/bu or maybe slightly below that before they bounce higher. We are then likely to see barley in southern Alberta rebound to the $4/bu level while in Manitoba we are likely to hit the $3/bu level.
However, watch the Canadian Wheat Board Pool Return Outlooks as the export market might be a viable option for barley producers this year.
– 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.