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New market lows as crops are huge

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Grain and oilseed futures at the ICE Canada futures market have dropped to fresh contract lows since my last column. The continued weakness in the economic markets is pressuring values down as is the weakness in the U. S. futures markets. Canola dropped well below $400/tonne as slow fresh demand and a record large canola crop sent prices lower. Bearish technical signals and pricing of forward delivery contracts by farmers weighed on the market as we came up to Christmas. Western barley has dropped sharply on declines in U. S. corn and slow demand.

Chicago soybean and corn futures also hit fresh contract lows, penetrating significant levels at $3.50/ bu for corn and $8.00/bu for soybeans. The problems in the financial market continued to weigh on prices. The soy complex declined as demand slowed with bearish technical signals also sending prices lower. Giving only minor support were drought problems for the South American soybean crops. China continues to be a stronger buyer of U. S. soybeans. U. S. corn futures fell as weakness in crude oil and sluggish export demand weighed on prices. Competition from cheap feed wheat, globally, also pressured the markets down.

Wheat futures fell sharply at all three U. S. markets. The losses in corn and soybeans did weigh on wheat values. A sluggish export pace and favourable conditions for the U. S. winter wheat crop also pressured prices down. Giving some support were smaller Australian and Argentine wheat crops.

STATSCAN SURPRISE

Statistics Canada brought out its latest crop production estimates and

shocked farmers and the grain trade with the large size of the crop. It seems like less-than-ideal weather had little impact on production.

The most shocking number came for canola as StatsCan pegged the crop at a record 12.642 mln tonnes, up from the Sept estimate of 10.887 mln tonnes and last year’s 9.529 mln tonnes.

This means supply this year will be a whopping 14.18 mln tonnes. With consumption set to be about 10.6 mln tonnes, supplies at the end of the crop year will be about 3.5 mln tonnes, a new record.

This is already pushing canola prices down and the farm gate prices have dropped below $8.00/ bu in many areas. In most areas, $8.00/bu is breakeven for producers. However, the trade now has a problem. Consumption of canola next year is expected to increase to about 11.5 mln tonnes as increased crushing capacity demands more canola.

The poorer prices, higher input costs and greater risk of growing canola will likely mean that canola acres are going to drop in 2009. In 2008, seeded area was 16.159 mln acres. If farm gate prices remain at these levels, it is likely that canola area would drop to the 15.0 mln acre level. With average yields the crop would be about 10 mln tonnes.

This would be a total supply of 13.5 mln tonnes for the 2009-10 crop year. If consumption hits 11.5 mln tonnes, as expected, then ending stocks will drop to 2 mln tonnes, which is 17 per cent of usage and not burdensome. If there is a threat that canola area would drop further than the 15 mln acre level then the industry will be in trouble.

As a result I still maintain this spring there will be a canola rally in order to attract seeding. Assuming that the global financial system can return to some kind of normalcy, I can see canola farm gate bids between $9 to $10/bu for the 2009-10 crop year contracts. The record strong pace of usage for the current 2008-09 crop year will help to bring canola futures back to the $8.00-$9.00/bu level after the current weakness fades.

LOTS OF BARLEY AND WHEAT

StatsCan pegged barley output at 11.781 mln tonnes, up from 11.219 mln in Sept and last year’s 10.98 mln tonnes. This makes for a total supply for 2008-09 of 13.3 mln tonnes. I am looking for consumption to be about 10.5 to 11 mln tonnes as feedlots have returned to full barley rations. This would put ending stocks at 2.3 to 2.8 mln tonnes which is burdensome and suggests weaker values.

Farm gate prices will likely fall in a $2 to $3.50 range with $4/bu likely to be the high in Alberta. Domestic barley prices will be higher than the export market.

StatsCan forecast the 2008 wheat crop at 28.611 mln tonnes, up from the Sept estimate of 27.266 mln tonnes and last year’s 20.054 mln tonnes.

I had been looking for higher exports in 2008-09, but to date exports are lagging. Everything suggests that exports will still outstrip last year, so for the time being, I will hold my total use estimate at 25.9 mln tonnes, up from 22.064 last year. This would leave ending stocks in 2008-09 at 7.5 mln tonnes, up from 4.816 mln tonnes. Much of this will be durum though, and I still feel that non-durum spring wheat ending stocks will not be burdensome.

However, the international market is reacting to a record large crop and not the fact that ending supplies are the fourth-tightest level in 20 years. I still feel prices will bounce back once the global financial problems are stabilized. Longer term the wheat outlook is actually quite friendly.

– 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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