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Canola prices defy gravity from heavy stocks

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

Grain and oilseed futures at the ICE Canada futures market rallied back since my last column, with gains in the U. S. futures markets supporting prices. Canola rallied as China picked up at least 5 to 10 cargoes of canola and was said to be looking for more. Strong demand and disciplined farmer selling contributed to the gains.

Technical signals were also positive, pointing to higher prices and likely a challenge of the $450 level once again, according to those who watch the charts. Exporters and crushers were strong buyers with elevator companies steady sellers. Cash bids were strong with good premiums available, particularly in Alberta and Saskatchewan.

Western barley also advanced in the wake of the gains in Chicago corn futures and on slow farmer selling. However the news was generally negative as barley supplies are large.

Chicago soybean and corn futures have also posted gains. Soybeans were boosted by a resurgence in concern about the South American crop. While the Brazilian soybean crop did get rain, the Argentine crop got only a small amount of moisture. China continued to be a strong buyer of U. S. soybeans. Corn futures advanced more modestly than soybeans with the dryness in South America contributing to the gains. A major support for the market came from export demand as USDA reported that for the third week in a row the weekly U. S. corn exports topped 1 mln tonnes. However, the large corn supply continues to hang over the market.

U. S. DRIVES WHEAT FUTURES

U. S. wheat futures were mainly lower in all three markets. There was general support in the market from dryness in the main Chinese winter wheat growing area. Ideas that Russia was running out of wheat for the export market also underpinned prices. However, wheat futures turned mostly lower as badly needed rain arrived for the parched U. S. winter wheat crop and international buyers continued to avoid U. S. wheat.

USDA released its Feb supply-demand reports and they were overall friendly to the market, although nothing was rampantly bullish. U. S. soybean 2008-09 ending stocks were lowered modestly due to strong exports. With only 22 weeks of the soybean crop year completed, exports are 60 per cent of the forecast total for the whole year. The major thing for oilseeds was a large drop in the size of the Argentine and Brazilian soybean crops.

The corn supply-demand numbers were largely neutral as ending stocks were left unchanged. This gave modest support though as traders had expected ending stocks to be increased. There were only modest changes in the wheat supply-demand scenario and the changes were considered neutral.

While grain and oilseed prices are well below last year, they are well above the 30-year average (unadjusted for inflation) with many almost twice as high as the average. The corn average is about $2/bu with the market currently trading in the $3.50-$4/bu range. The

30-year average for wheat has been $3.50/bu with current prices around $5.50-$6.00/ bu. The 30-year soybean average has been around $5.50/bu with current soybean prices at $9.50-$10.00/bu.

This reflects the concern that demand is still outstripping supply and that the cushion of grain and oilseed stocks in the world is too small to depress the market. Adjusted for inflation prices lag even more. Current corn futures are 32 per cent below their 30-year average, soybeans are 27 per cent below their inflation adjusted average while wheat is 25 per cent below the 30-year average. These numbers come from Credit Suisse in Zurich and is causing them to be very bullish on the grain and oilseed outlook, despite the economic problems globally.

CANADIAN STOCKS UP

The Statistics Canada Dec. 31st grain stocks report, released on Feb. 5, confirmed that supplies of grains and oilseeds are larger than last year. However, looking a bit deeper in the numbers reveals that canola supplies are much tighter than you might expect given the large supplies at the end of last year and the record large crop this year.

At the end of the 2007-08 crop year, canola supplies were 1.54 mln tonnes and 2009 production was a record 12.643 mln tonnes. This means that 14.359 mln tonnes of canola were available to the market and everyone assumed that canola would swamp the system and drive prices back below $7/bu, yet farmers in the past month have received $10/bu for their canola and prices have trouble dropping below $9.

The main reason is the demand pace, which has been moving at record levels. Analysts have been expecting to see the crush pace drop from its hectic average level of 94.18 per cent of capacity as canola oil prices have dropped and it looks like we are building a glut. However, the pace has not slowed with 2.105 mln tonnes crushed to date. I am looking for the strong crush pace and big spring seed demand to boost domestic canola demand to 5.059 mln tonnes in 2008-09 from 4.325 mln last year.

Exports are also moving at a blistering pace with China likely to take 2 mln tonnes of canola. I am pegging the total 2008-09 exports at 7.00 mln tonnes. This would leave ending stocks at 2.3 mln tonnes, well below the early predictions for 3 mln tonnes.

The StatsCan stock numbers would support this level of ending stocks. Also supporting this forecast are the Canadian Grain Commission numbers as of the end of Feb. as they peg canola exports at 3.52 mln tonnes, up from 2.85 mln last year. They also report that domestic use is running at 2.296 mln tonnes, up from 2.172 mln tonnes last year.

The fear of farmer selling also seems to be overstated by the trade as farmer deliveries to Feb. 1 are 5.6 mln tonnes, up from 5.0 mln at the same year while the visible supplies being held by companies are only 945,400 tonnes, down from 1.29 mln tonnes last year.

So what does this tell us about old crop prices? That values will remain firm in the $9-$10/bu range with pushes above $10/bu as supplies tighten. New crop futures currently are trading at a premium to the old crop (this is the opposite of Chicago soybeans) which suggests the trade is not yet totally convinced that farmers will expand canola area sharply. New crop cash prices should equal the old crop until we have a handle on 2009 canola planting.

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