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Canola At Eight-Month High, Markets Turning Bullish

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For Don Bousquet’s three times daily market reports, visit www.albertafarmexpress.ca

MAY 18

Grain and oilseed prices at the ICE Canada futures market have moved higher since my last column, with canola climbing to its highest level since last September. Canola was supported by strength in the U.S. soy complex, a strong export lineup, favourable crush margins, slower farmer selling and friendly technical signals. Weather delays in planting the crop also helped to boost the market as the new crop saw the biggest gains.

Weighing on the market was the strong Canadian dollar and the lack of significant fresh export sales. The buying came from crushers with exporter pricing and good levels of speculative buying noted, mainly from commodity funds. Western barley saw modest gains during the week on firmness in U.S. corn and slow farmer selling.

Chicago soybean and corn markets have also advanced. Soybeans were lifted by the tight old-crop supplies, continued strong demand out of China and bullish technical signals. The new crop followed the old crop higher with smaller gains noted on ideas that soybean acres will be higher, due to rain delays in corn planting. Corn futures advanced as demand remained strong, outstripping trade forecasts. Rain delays in planting corn also boosted the market. Technical signals were bullish and that prompted gains as well. Farmer selling did accelerate as corn prices rose, but the market absorbed it.

SPRING PLANTING DELAYS

U.S. wheat futures were steady to higher with the biggest gains in the Minneapolis spring wheat futures. Minneapolis was boosted by the continued delays in spring wheat planting and talk that farmers were switching from spring wheat to other crops. Kansas City wheat followed the Minneapolis market higher and drew support from a forecast for a smaller U.S. winter wheat crop. The gains in KC and Minneapolis spilled in to support the Chicago markets but the market there was really little changed on the week.

USDA brought out its latest supply-demand reports on May 12th and generally confirmed that the market outlooks are improving.

For soybeans, USDA lowered the 2008-09 ending stocks to 130 mln bushels from 165 mln as the exceptional export demand, mainly from China, continued. It also lowered 2009-10 U.S. soybean ending stocks to 230 mln bushels due to the lower carryin from this year. The 2009-10 ending stocks estimate is likely a bit on the low side as corn planting delays are going to result in more soybean acres in 2009. Informa Economics is forecasting 78.3 mln soy acres, 2.26 mln more than USDA.

However, with the smaller global supply that increase may not prove as negative as might be thought. Right now new-crop soybeans are about $1.50/bu below the old crop which suggests that we could see new-crop soybeans drop as low as US$8-8.50 before prices recover after the harvest.

DEMAND DRIVES CANOLA

This is a solid backdrop for the canola market where cash bids have hit $11/bu. in parts of Western Canada, as demand is going to be exceptional. Record exports and record crushing will draw what had been burdensome canola supplies down to almost tight levels in the 1.5 mln-tonne level in 2008-09.

Exporters have started to fairly aggressively price in the new-crop Nov. futures contract which suggests that the demand will continue to be around in 2009-10. As a result, I have revised my new-crop highs up to the $12/bu. level after the harvest. I still think we have some downside in the market this summer though.

The canola outlook has turned very friendly. Globally, consumption of canola/rapeseed will outstrip production 2009-10. Wellrespected Oil World magazine is forecasting that ending stocks of rapeseed/canola will drop to 5 mln tonnes in 2009-10 from 7.7 mln tonnes in 2008-09. While I do not see a return to the highs of last year, it should be a very profitable year for canola producers.

CORN EXPORTS BRISK

For corn, USDA forecast that 2008-09 ending stocks would drop to 1.6 bln bushels from the April estimate of 1.7 bln as exceptional export demand is eating through the large supplies. Even more positive for feed grain prices was the 2009-10 U.S. corn ending stocks estimate of 1.145 bln bushels as USDA cut the average yield due to delayed planting.

However, it did not significantly cut corn acres. Informa is estimating U.S. corn acres at 83.9 mln, down 1.07 mln from the last USDA estimate. Other traders say that corn acres will be down as much as 2 mln acres due to the delayed planting.

All of this suggests very strong corn prices in 2009-10 with the market likely to see US$5/bu. at some point in the winter. This supplies a strong backdrop to Canadian barley. However, barley will still have to contend with large supplies, high production in 2009 and smaller livestock numbers. The result, though, will be a return to the $4-4.50/bu. level in Alberta.

U. S. WHEAT STOCKS DOWN

The wheat supply-demand numbers from USDA also supported the market overall. For the U.S., it lowered the ending stocks modestly to 669 mln bushels from 697 mln in the April forecast. It lowered 2009-10 to 637 mln. The main reason was a smaller U. S. winter wheat crop at 1.502 bln bushels, down from 2008’s 1.868 bln bushels. Reduced acres and weather problems accounted for the decline.

USDA did not officially forecast the spring wheat crop, but the numbers suggest it is looking for an average crop. However the delays in spring wheat planting suggest that yields will be down and that acres should also be reduced. As a result the expectation is that 2009-10 U.S. wheat ending stocks will be even lower than this forecast. Some analysts are looking for them to be below 500 mln bushels.

This would normally be very supportive for the market. However it is being partially offset by the fact that USDA is looking for global wheat supplies to see a major increase and ending stocks in 2009-10 increase to

181.9 mln tonnes from 158.1 mln in 2008-09. However, this is not a sure thing and already we are seeing the Argentine wheat crop will be a disaster.

As Minneapolis spring wheat futures climb above the US$7/bu level, it seems fairly certain that Canadian farmers will likely see their wheat bring at least C$8-$9/ bu.

The durum outlook though remains muted as the world’s major buyers in North Africa seem to be having a fairly good crop.

Overall, the 2009-10 looks like it will be a profitable year for grains and oilseeds and the possibility exists that it could be very profitable.

– 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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