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Big crop but canola holding up well

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Grain and oilseed futures at the ICE Canada futures market have continued to decline since my last column. The general weakness in the U. S. market, the global financial instability and the record large canola crop pressured the market down. Trading volumes were light and dominated mainly by commercials as exporter and crusher buying met commercial selling. Grain companies and crushers were forced to place premiums on for canola deliveries as farmers held onto supplies with the cash basis in Alberta rising to as high as $5.00 under futures. Western barley dropped sharply in the wake of losses in the U. S. corn market. However, much of the pressure was associated with commodity funds liquidating their positions.

Chicago soybean and corn markets have also dropped to fresh lows on the general financial instability and economic turmoil in the U. S. and in the world. Soybeans were also pressured down by the completion of the harvest. Underpinning the market were weather problems for the South American soybean crop and very strong demand for U. S. soybeans from China. Corn futures posted losses in step with the decline in the crude oil market and on advances in the U. S. corn harvest. Sluggish fresh export demand also undermined corn values.

U. S. wheat futures have seen modest declines in all three markets as the lack of strong demand and the global economic problems weighed on values. Aggressive fire sale pricing by Russian and Ukrainian grain traders also weighed on the market. Ideas that U. S. wheat prices are at reasonable prices gave some support.

The canola market continues to deal with the record large supply of canola in Western Canada and is actually holding up quite well. In the past when this much canola was forecast for ending stocks, canola cash bids fell below $5.00/bu. This occurred just a few years back in the 2005-06 crop year.

On Dec. 4 StatsCan is expected to bring out its latest production reports and it is expected to show that the 2008 canola crop, despite problems in the Interlake of Manitoba and Alberta’s Peace River region, hit about 12 mln tonnes. Some feel the number may even come in as high as 12.5 mln tonnes. This would be up from last year’s record 9.529 mln tonnes.

Given this huge crop, total supply would be at an unprecedented 13.5-14.0 mln tonnes. In the face of this record supply canola values at $8.00-$9.00 are quite good and suggests that there are other influences balancing off the burdensome supply.

Demand has been occurring at an unprecedented pace and is likely to be a record level. Export movement to Nov. 16 totalled 2.098 mln tonnes, well ahead of last year’s 1.581 mln. The expectation is that we will see a record canola export movement of about 6 mln tonnes. We may actually have been able to export even more, except for the rationing of transportation that is forced on Canadian agriculture by the mountains.


On the domestic use side, the pace has also been very strong. The Canadian Oilseed Processors Association reported that the crush pace to date is

1.229 mln tonnes, up from last year’s 1.195. Crushing is running at 93.5 per cent of capacity. This is an unheard of utilization pace and will likely not be kept up all year. However, we are going to hit a record crush level of about 4.6 mln tonnes.

With a total available supply of 13.5-14.0 mln tonnes and consumption of 10.6 mln tonnes, 2008-09 canola ending stocks will build to around 3 mln tonnes, which will also be a new record. This would suggest that canola is very bearish and that prices should be much lower than current values.

However, the market is building in the coming year’s demand which is expected to hit another new record. As a result, 2009 canola production needs to be very high. In fact, more than just next year’s consumption, the market is looking forward to 2012 when biodiesel mandates will result in a significant demand for canola for biofuel. It is felt ultimately that 2 mln tonnes of canola will be used exclusively for biodiesel in the not-too-distant future.

Expectation is that canola exports in 2009-10 will remain at record high levels, of at least 6 mln tonnes. However, the big increase will come on the domestic crush side as expansion of crushers and the addition of two new crushers in Yorkton, Saskatchewan will lift the crush to the 5.0-5.2 mln tonne level.

This means that in 2009-10 demand is expected to be 11.0-11.5 mln tonnes, another new record. If canola acres hold at the 2008 level of acres, production, with average yields, would be about 10.5 mln tonnes. This means that we begin the next crop year with 3 mln tonnes of canola and produce 10.5 mln tonnes, the total supply will be 13.5 mln tonnes.

With demand expected to be 11-11.5 mln tonnes we would see canola ending stocks in 2009-10 fall to about 2 mln tonnes, which is no longer considered massively burdensome. In fact the trade’s ideal ending stocks number right now is about 1.6 -1.8 mln tonnes.

This is the reason that canola prices are holding up and the trade is holding its breath on keeping canola acres reasonably high, despite the high input costs. The feeling in the trade is that current canola prices are not high enough to maintain canola acres unchanged from 2008.

Generally, the trade feels that if canola farmgate prices hit about $10. 00/bu and futures hit $500/ tonne in the spring period and that farmers can be of fered forward contracts at those prices, canola acres will remain at 2008 levels or better.

This does not mean that we will not see some dismal prices this year yet. But the need to get canola out of farmers’ hands and encourage producers to keep acres high will keep canola prices at more attractive levels than you would expect, given the record large supply and ending stocks.

For those wondering whether biofuel will be part of the future, President-elect Obama, on the TV news magazine program 60 Minutes, stated unequivocally that he supports ethanol and biofuels and that he wants their use developed now while crude oil prices are falling. On Monday Nov. 17, the U. S. government set the amount of ethanol that must be blended into the 2009 U. S. fuel supply at 10.21 per cent, up from 7.76 per cent. This means that the big oil refiners will need to blend 11.1 bln gallons of biofuels, mostly ethanol, into the U. S. fuel supply.

This is going to help and fuel the third fight for acres between soybeans and corn this spring and further support the canola 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.



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