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 higher since my last column. Canola has bounced around, but is seeing moderate gains. Strength in the U.S. soy complex, friendly technical signals, a weaker Canadian dollar and talk of export interest supported prices. Weighing on the market was heavier farmer selling as farm cash bids hit the $9/bu. level in some areas. Ideas the market was overbought and the lingering uncertainty surrounding exports to China weighed on the market. The locomotive engineers’ strike against CN Rail also weighed on the market. Western barley posted small gains mainly on the lack of farmer selling. Demand was sluggish.
Chicago corn and soybean futures were higher with fractional gains in corn but very strong advances in soybeans. Soybeans were boosted by export and domestic demand and friendly technical signals that trig-g ered speculative buying. Corn edged up on an overall weak U.S. dollar, harvest delays due to rain and friendly technical signals that triggered speculative buying. At the highs, farmers started selling and that weighed on the market along with poor export demand and improving weather for the harvest.
U.S. wheat futures soared back to the $6/bu. level on technically based speculative buying and the weak U.S. dollar. At that level farmer selling developed which trimmed the gains back from big advances to just moderate strength. Ample global wheat supplies also weighed on prices.
IT’S ABOUT THE MONEY
Markets have seen solid gains in recent days and I have had a few calls from farmers wondering if this is the rally I have been talking about. This certainly may be the beginning of it, however this rally is all about the flow of speculative money in the world.
Savvy U.S. and global investors can borrow money right now at almost zero per cent interest and they are borrowing billions to invest in things that will make them money. They are shorting the U.S. dollar because it looks like it wants to go down and they are investing in commodities like crude oil, gold and grain because they look like they want to go up.
The problem is that much of their investment is making the markets move higher, regardless of the fact that the fundamental news in the commodity is bearish or negative.
Wheat is a prime example. Global and U.S. wheat supplies are ample to burdensome which should be weighing on the market. But the speculators see wheat as cheap when they can borrow U.S. dollars for almost zero interest. Their buying has turned chart patterns friendly and that has triggered more speculative buying.
There are two things that can rapidly change this pattern of speculative buying and dash the profits in the grain markets. The first is if U.S. and global interest rates start to climb again. Right now there does not seem to be a threat from inflation so the central banks are not under pressure to lift interest rates.
The low interest rates are being used by countries to stimulate their lagging economies. This is having some positive impact on the economies, but the improvement is proving to be much slower than had been expected and as a result the central banks are feeling pressure to keep the interest rates down.
The second thing that needs to be watched is the U.S. dollar. It has been the plunge in the U.S. dollar (encouraged by the U.S. government) that has also helped to boost the market. As the U.S. dollar falls, commodities priced in U.S. dollars have to rise, not because the value is increasing due to demand or shortages. The value is rising because the intrinsic value of the U.S. dollar is falling making commodities more valuable.
If the U.S. government finally decides to do something to support the dollar, the grain markets could turn around fairly quickly and lose value. Right now the U.S. government feels that a falling dollar is good for the U.S. economy as it will make U.S. exports cheaper.
Be aware that the U.S. dollar is a factor in these markets and its value has nothing to do with the fundamental value of your wheat or canola. Many analysts are looking at this rally as a good opportunity to do some pricing in anticipation of values dropping when either interest rates or the U.S. dollar start to go higher.
If it turns out that the U.S. does nothing to support the U.S. dollar or lift interest rates then the market highs are going to be much higher than I or anyone originally thought.
The current U.S. administration is amazingly inept when it comes to the economy and they are being led by a president who does not seem to be able to make a decision.
With the U.S. facing elections next year and the polls starting to swing against Obama and the Democrats, the U.S. government pressure will be to keep interest rates and the U.S. dollar low. This should be good news for the markets including canola.
CANOLA SUPPLIES TIGHT
Canola will be strong in the 2009-10 crop year regardless of the U.S. situation. The Chinese situation will cost us some exports, but with the smaller crop this year, compared with last year, ending stocks are still going to drop back as other countries will be increasing their demand for canola.
Exports were going to be down in 2009-10 at least two mln tonnes even without the reduced Chinese buying because of blackleg.
We are also on the cusp of a major increase in the crush capacity. While some crushing plants are having problems with canola meal sales to the U.S. because of salmonella, the new plants have technology that can overcome this. The canola crush this year is currently running about 19 per cent or 100,000 tonnes behind last year. However, as the new crushers come online look for the crush pace to see a sharp increase which will ultimately put us ahead of last year.
Already in the Yorkton area (where the new crushers are) basis levels have seen considerably better levels for canola deliveries.
If the markets continue to be heated up by the weak U.S. dollar and low interest rates, canola farm gate prices could climb to the $10-$11/bu. range once again. If the U.S. dollar rallies and interest rates start to move higher then the canola cash bids will only climb to the $9-$10/bu. level this winter.
Also be aware that the grain trade wants to keep canola acres from dropping any more and in fact would like to see another one mln acres planted next spring. This can only be achieved by offering good prices.
– 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