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Dry West, Wet East Means Tight Canola Stocks

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

Grain and oilseed prices at the ICE Canada futures market are generally a bit higher since my last column. The markets derived some support from the crop problems induced by weather. Trading volumes were subdued as many participants have taken to the sidelines to assess the crop situation. The lack of fresh canola export booking undermined the markets as exporters are taking a very cautious approach to making sales. Giving support was the smaller canola supply in 2009-10 and expectations for much tighter supply. Routine commercial demand met only light country movement and some commercial liquidation selling. A weaker Canadian dollar also gave modest support.

Western barley futures generally saw losses in the old contracts on liquidation and a lack of interest while the new barley contracts, introduced on June22, actually rallied with moderate volumes of trade. The overwhelming majority of the trade was in the new contracts. End-user demand gave support with sluggish selling forcing the buyers to take the market higher despite weakness in the U. S. corn market.

U.S. FUTURES

Chicago soybean and corn futures have been mixed since my last column with trading volumes light to moderate. Positioning was noted ahead of the June 30 USDA grain stocks and acreage report. Generally the expectation was the report will show higher soybean acres and lower corn acres. Soybean futures were mixed as the old crop was boosted by the tight old-crop supplies. The new crop was undermined by the expectation for higher acres with favourable weather also pressuring the new crop down. Corn futures posted losses on the favourable weather outlook and bearish technical signals that prompted strong speculative selling. Giving some support was strong exports and ideas that corn acres are down.

U.S. wheat futures continued to tumble as the advancing winter wheat harvest and beneficial growing conditions for the spring wheat crop weighed on prices. This is a normal seasonal move lower that occurs every year. Sluggish exports and ideas that U. S. wheat is still overpriced weighed on values as well. The only support in the wheat markets came from ideas that prices have dropped too low and the market is due for a technical rebound.

CANOLA ACRES ABANDONED?

The ma in focus of the Canadian market right now is canola and crop size. The StatsCan acreage estimate of 15.8 mln acres, released June 23, was down from last year’s 16.16 mln. However, traders say this is still too high as reseeding and abandonment of some acres will actually see planted canola area down to about 14.5-15 mln acres. Additionally, the dryness in Saskatchewan and Alberta and the cool wet spring in Manitoba will reduce the yields by at least 10 per cent below average. The feeling is that the 2009 canola crop will be around 8.5-9.5 mln tonnes, down from last year’s 12.6 mln tonnes.

This will give Canada a total canola supply of only about 10 mln tonnes. Given that consumption is much higher than that, can we run out of canola? The answer is no as the market will need to rally to ration the available supply by moving up to prices where demand stops.

Crushers look like they will take about 5.5 mln tonnes, although they probably would prefer 5.7-6.0 mln tonnes for crushing. That leaves only about 4 mln tonnes for the export market. This will barely meet our traditional export customers.

The ultimate impact will be that canola ending supplies in 2009-10 will be very tight, likely in the 600,000-800,000-tonne range. There was a time when that was considered a lot, but with the expansion of the crushing and export demand for canola it is actually very tight. It is foreseeable that 2009-10 will test the level that canola ending stocks can fall to.

This will occur at a time that global canola/rapeseed supplies are tight and the global consumption will outstrip global production.

As a result current canola values are well under the levels they are likely to be this fall and winter. The main negative factor hanging over canola is the fact that U. S. soybean supplies should be large and the South American soybean crop is likely also to be a large one. This will keep canola in check, but we are certainly likely to see prices back to the $12/bu. level at the farm gate. Higher prices are possible if the global soybean supply has any problems.

BARLEY ACRES MAY RISE

Another interesting number in the June 23 StatsCan acreage report was barley at 8.77 mln acres, down from 9.35 mln last year. The feeling is that a lot of the reseeding this year went into barley and that acres are more likely to be around last year’s level than the StatsCan estimate. Yields will likely be below average due to weather conditions and the crop is expected to be around 9-9.5 mln tonnes. Even with reduced exports and domestic use, consumption is likely to be around 10-10.5 mln tonnes.

This would leave 2009-10 barley ending stocks at 1 mln tonnes or a bit less. This is a very tight level and supports higher barley prices. The domestic market will see the best prices as the international barley market will be glutted by large international production.

Also supportive is the fact that U. S. and global corn supplies are going to be very tight which means firm corn prices in the international market. All this suggests that we will see $5/bu. barley at some point.

The new barley contract that is deliverable in southern Alberta was introduced on June 22 and has already started to attract interest. The open interest is still modest, but the contracts are seeing greater activity than any other contract introduced by the Winnipeg market in recent years.

It actually is a well-structured contract and should see good participation particularly in a year like this where volatility looks like it will be high and it will be in end users’ interest to lock in current prices. Some skeptics suggest that many barley traders have been successfully using U. S. corn as a hedging vehicle. However, I think that with corn being tied to crude oil because a third of the U.S. crop goes into ethanol production, corn futures will become a very poor hedge tool for barley.

And talking about the new barley contract, there are ideas that the relatively high open interest in the old Oct. contract suggests that there may be some fireworks in the contract as we approach the fall and the need to liquidate appears.

– 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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