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Grain and oilseed prices at the ICE Canada futures market rallied to eight-month highs since my last column, backed down sharply from the highs and then bounced back. This bumpy ride reflected the tightness of old-crop canola supplies and planting delays. However the rising Canadian dollar slowed demand, which sent the market into a tailspin, only to bounce back on weather problems. Underpinning the entire canola market was a strong advance in the Chicago soy complex, the falling ending stocks level for canola and steady speculative buying.
Exporters, crushers and commodity funds were buyers, with the selling coming from commercials. Commodity funds are estimated to have bought 25,000 to 30,000 contracts since the July contract passed the $420 level.
Western barley futures were also up since my last column. Barley was supported by the gains in U.S. corn futures, but the market is still being plagued by low volumes which accounts for its large price movements up and down.
Chicago corn and soybean futures have rallied with the new crop gaining more than the old crop. The plunge in the U.S. dollar, as the record U.S. debt and the unrestricted printing of money drove the greenback lower, gave support to prices.
Soybeans were supported by the continued tightness of old-crop soybean supplies and buying by China. The new crop was supported by the delays in planting the U.S. soybean crop. Technically based buying was also evident in the trade. Corn futures advanced as export demand remained strong and the market drew some support from the gains in crude oil. The continued delays in corn planting are thought to have reduced corn acres by about one mln from the last USDA report. Weighing on the corn market was uncertainty about the U.S. government’s support for ethanol production.
U.S. WHEAT PROBLEMS, TIGHT SOY
U.S. wheat futures surged on problems in the U.S. wheat crop. Lower yields coming in for the harvested crops in Texas and Oklahoma, disease in some of the winter wheat acreage and continued delays in planting the spring wheat crop boosted the markets. In addition, speculators, in the form of commodity funds, turned aggressive buyers in all three wheat pits in the U.S.
All markets are turning increasingly bullish but the oilseed markets are attracting the greatest interest. Globally, we are seeing a significant rally in palm oil which is significant for the canola market, as canola reacts to vegetable oil prices. The surge in crude oil prices is also supportive as there is rising demand in the world for rapeseed/canola for biodiesel.
The U.S. soybean market is increasingly bullish and the May USDA supply-demand report is already inaccurate. At that time, USDA forecast U. S. 2008-09 soybean ending stocks at 130 mln bushels. Now most analysts are at or below 100 mln bushels, which would only be 10 days of supply. On top of that the arrival of new-crop soybeans is being pushed back by the poor weather that is delaying planting.
This will make for a volatile, but generally strong old-crop soybean market through the summer, which will spill in to support the canola market. I now expect old-crop soybean prices to swing between $10-$13 per bushel. The Chinese demand that has eaten up the supply is continuing despite the higher prices.
There are those who feel that China’s buying is part of plan by China to reduce the amount of U.S. dollars it is holding by turning them into a commodity that will not lose value.
New-crop soybeans will be supported by lower U.S. ending stocks. In the May report, USDA pegged U.S. 2009-10 soybean ending stocks at 230 mln bushels. However the lower 2008-09 ending stocks forecast will reduce the 2009-10 level to below 200 mln bushels, despite higher production. The later the soybean crop gets planted, after May 20, the lower the yields. It looks like new-crop beans will remain above the $9.50 level and could climb to the $12/bu. level depending on the size of the crop.
CANOLA MOVES ON ITS OWN
This is an incredibly bullish backdrop to canola, which has its own bullish numbers. At the beginning of the 2008-09 crop year, the record canola crop of 12.64 mln tonnes was expected to depress the market as ending stocks would likely be close to the three-mln tonne level.
However, the market did not anticipate China’s appetite for canola and North American demand for canola oil which resulted in record exports and record crushing in Canada. As a result 2008-09 canola ending stocks will be a very reasonable 1.5 mln tonnes. That accounted for cash prices rising to near the $11/bu. level at the end of May. This will keep the old crop supported, although I am still looking for some weakening once the crop gets planted.
For the new crop, production is likely to be 10.5-11.5 mln tonnes as farmers plant more canola than they indicated to Statistics Canada in March. Expectation is that acres will be a mln higher than the StatsCan forecast, back to last year’s record level. However, consumption will be strong for canola. The two new crushers in Yorkton will need almost 1.75 mln tonnes of canola to crush at full capacity. The crush in 2009-10 is expected to climb to a record 5.5-5.8 mln tonnes.
Exports will need to fall as we will not have enough canola to meet demand. Exports will likely drop to 6-6.5 mln tonnes. This will put 2009-10 canola ending stocks below one mln tonnes and keep the market well supported in 2009-10 with cash prices around the $10/ bu. level with peaks hitting as high as $12/bu.
The spoiler for the canola market will be the Canadian dollar which looks like it wants to hit parity with the greenback if the Americans don’t find a way to curb their debt and support their currency. Regardless it will be a strong year for canola and any weather problems will send the markets sharply higher, likely into the teens for both soybeans and canola.
– 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.