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Grain price outlook muted by bearish economy

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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 worked lower over the past few weeks as steep declines in the Chicago futures markets and the continued instability in financial markets pressured prices down. Canola saw modest losses in the face of the steep decline in the U. S. soy complex as a big drop in the Canadian dollar gave support. Slow farmer selling also limited the price slide. Western barley saw moderate declines in light trade with the lack of farmer selling keeping the declines less than the U. S. corn market.

Chicago futures dropped sharply on the turmoil in the economic markets. Soybeans and corn were also pressured down by the lack of a frost threat to the crop despite the delayed maturity. Soybeans were undermined by slow demand, although China was in the market during the week making some large purchases. Corn futures saw big losses as speculative selling and the slow pace to demand allowed the market to fall. In both corn and soybeans cash markets were firm as farmers held onto their supplies.

U. S. wheat futures declined as the favourable outlook for the U. S. winter wheat crop and the continued financial instability sent the market down. Speculative selling was also prompted in all three U. S. wheat futures markets by bearish technical signals. The market ignored steady to strong export demand and problems in both the Australian and Argentine wheat crops.

FUNDS GET CAUGHT

Grain and oilseed futures have dropped sharply since the summer with fundamental news (the balance between production and consumption) being a minor negative factor. The main bearish factor is the weak economy and the selling that is coming into the grains and oilseed sector prompted by the problems of commodity funds. Those funds have been forced to raise cash by selling grain and oilseed futures since early September when the U. S. government virtually took over Fannie Mae and Freddie Mac.

The takeover of “Fannie and Freddie” caught the funds holding large amounts of those stocks which became virtually worthless overnight. The second major event that caused fund selling was the failure of Lehman Brothers, which was a major broker for the funds. The Lehman situation is likely not over and there will be continued selling pressure in the market as a result.

Be assured, though, that the supply-demand balance of most grains and oilseeds suggests that once this selling is over, prices will bounce sharply back. The main exception will be canola where some analysts feel the crop size is a whopping 12.5 mln tonnes.

The world wheat situation has become increasingly bearish, but is really not as bad as was seen early in this decade. USDA is pegging the world wheat carryover at 144.41 mln tonnes, up from 119.80 mln in 2007-08. This estimate is likely high as the Australian and Argentine wheat crops are smaller. However, this is the highest carryover since 2005-06 but is still less than half the level at the beginning of the decade.

What makes the wheat outlook more bearish though is the fact that the U. S. wheat carryover for 2008-09 has been raised by

USDA to 601 mln bushels from just 306 mln in 2007-08. This is above the significant 500 mln bushel level.

Canadian wheat production is expect to be about 28 mln tonnes with exports at 18.0 mln tonnes and domestic use at 8.5 mln tonnes. This should leave ending stocks at about 6.3 mln tonnes, which is not burdensome.

After a move to its lows, I am looking for global wheat prices to bounce back to the $6.50 -$7.00/ bu level.

CORN STILL TIGHT

While you wouldn’t know it from the price of corn, the 2008-09 global corn carryover is going to be the second-lowest level in almost 20 years at 107.76 mln tonnes, down from 2007-08’s 122.88 mln tonnes.

The U. S. situation is also very tight, with USDA pegging ending stocks at 1.088 bln bushels, well below 2007-08’s 1.624 bln bushels. The 2008-09 carryover will likely be revised higher in coming months due to larger U. S. production and reduced ethanol use. We will likely see those ending supplies revised up to 1.3 bln bushels which will keep the market under modest pressure.

The Canadian barley outlook has loosened up considerably as production looks like it will come in at about 11.5 mln tonnes, well above last year’s 10.98 mln tonnes. Consumption will be lower, as less livestock in Canada and a better-supplied international market reduce demand. Exports are likely to fall to 2.0 mln tonnes from 3.89 mln last year. Domestic use will likely rise, mainly because of reduced imports of corn. It looks like total consumption should be about 9 mln tonnes. This will leave ending stocks at the 1.7 mln tonne level, which is mildly friendly.

This supports the recent losses in the barley market. We will likely see barley drop as low as $2.00/bu with most of the Prairies trading in the $2.00-$3.50 range with the occasional spike to $4.00/bu, mainly in northern Alberta.

OAT STOCKS UP

The oats outlook has turned quite bearish with ending stocks expected to build to burdensome levels. Production looks like it will hit 4.5 mln tonnes, down slightly from last year’s 4.696 mln tonnes. Exports will be about 2.5 mln tonnes with domestic use at 1.7 mln tonnes. The result will see ending stocks increase from 975,000 tonnes to about 1.275 mln tonnes. This will keep the market under pressure. We should see prices range from about $1.75-$3.00 per bushel into the end of the year with prices possibly touching $3.75/bu.

There is an interesting development in this market though. A U. S. company has bought up storage in the Duluth/Minneapolis area and is holding as much as 500,000 tonnes of Canadian oats there. It was expecting to see a shortage develop in the U. S. market. It would then sell the cash supplies at a huge profit. However, the “squeeze shortage” never occurred and traders are waiting to see what will happen to those oats stocks. If they dump them into the U. S. market, exports could be lower and prices poorer. This will have to be watched.

So while the markets are much less bullish than they were in the spring, the price outlook is still reasonably strong and is certainly not as dismal as the early part of this decade. It still looks like prices will remain higher for the last part of the decade than in the first half. The need for acres in the spring will also encourage a firmer tone in the Mar-May period. Relative to the rest of the economy, grains will outperform it.

– 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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