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Weather And The U.S. Government Affecting The Markets

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

(July 28)

Grain and oilseed prices at the ICE Canada futures market have dropped sharply since my last column. Canola has been pushed to its lowest level since March on the improved crop condition and the amazing rally in the Canadian dollar. Weakness in Chicago soyoil contributed to the declines as did the lack of any non-routine export buying. Routine exporter and crusher buying met both speculative and commercial selling. Crushers were also sellers as crush margins deteriorated. There was also selling out of Europe as they hedge their new crop. Speculative selling was steady, but light. Western barley posted moderate losses as the market focused on the lack of end-user demand, the improved crop, and weakness in U.S. corn.

Chicago corn and soybeans have also seen losses on favourable growing conditions in the Midwest. Bearish technical signals weighed on prices for both corn and soybeans. However for both corn and soybeans, demand remained strong with export demand higher

than traders expected. A weak U.S. dollar also gave support as did news that the U.S. government was going to resurvey corn farmers about their corn acreage.

SUPPLIES WEIGH ON WHEAT

U.S. wheat futures saw losses in all three markets as sluggish export demand and favourable growing conditions for the spring wheat crop weighed on values. Egypt’s unexpected purchase of Russian rather than U.S. wheat pressured prices. Egypt had been complaining about the Russian wheat quality which prompted traders to expect Egypt would avoid Russian wheat. Revisions higher in the size of the Australian wheat crop also weighed on markets.

A major piece of news since my last column was the USDA indicating it will resurvey U.S. farmers to see if acreage differs from the June 30 forecast, which raised U.S. corn acres sharply.

The original survey was done early in June and the trade feels that the cool, wet conditions of June cut corn acres. Most analysts are looking for the resurvey to cut acres, but the estimate range is wide. The feeling is that they could be lowered from 250,000 to 1.5 mln acres with the bulk of the trade looking for it to be lowered about one mln acres. However, there are a significant number of traders who feel there will be little change to the number. USDA will have the new number in its Aug. 12 supply-demand report.

Another question that will have to be addressed is where did those corn acres go? If corn acres fall one mln acres, as expected, did they go into soybeans?

FUNDS UNDER FIRE

Another U.S. government move has had significant impact on wheat prices. The Commodity Futures Trading Commission (CFTC) is unhappy with the inability of U.S. cash and futures wheat prices to converge as they should when the futures contract becomes the cash month.

The situation is blamed on index funds who trade wheat (they are also in the canola market). Their position is always long the market which critics say artificially inflates futures prices. Because these funds use grain futures to protect or hedge their positions in commodity indices which they also trade, they have been given special margins and position limits that usually are only available to hedgers, like grain companies. As a result their market position is a hedge of an index not of the price of wheat which impedes the convergence between wheat cash and wheat futures prices.

The CFTC is proposing smaller position limits for index funds which has helped to deflate the wheat markets over the past month. While this will cause some initial volatility, it will eventually be good for the market.

RECORD CORN YIELDS?

Another big factor in the markets both in the U.S. and Canada was favourable weather.

In the U.S., the Midwest has experienced cool and wet conditions which have been very good for crop development, but is making the crop quite late. It is causing corn traders to talk about record yields for the U.S. corn crop and that drove corn prices close to the US$3/bu. level, before the government announced it would resurvey corn farmers about their planting.

Analysts say that even if corn plantings are down one mln acres, higher yields will offset the lower acres. This will have to be watched.

The U.S. corn crop is running several weeks behind normal development which means that it may be vulnerable to even a normal frost. The latest long-term forecasts for the U.S. Midwest call for below-normal temperatures into September which means that the market will be on pins and needles until we see the crop mature.

The situation is the same for soybeans which have seen good weather so far, but the crucial time for soybeans is coming up in August and we will have to wait and assess the crop after podding.

The soybean crop is also well behind normal and will be vulnerable to frost. Also without heat units what happens to yields?

In Canada, traders are talking about canola yields improving significantly due to rains in Alberta and Saskatchewan and drier conditions in Manitoba. The cool conditions are felt to be ideal for the crop. One Manitoba farmer was telling me that what he lost in acres to excess moisture was being balanced off by what looked like very strong canola yields.

SMALL BARLEY CROP, BUT…

Farmers were wondering why the small barley crop in Western Canada was not translating into really strong prices. Some say the barley crop might be one of the smallest on record. However, offsetting the smaller crop are imports from the U.S. of both corn and dried distilled grains, both with and without solubles. Alberta sources are indicating that livestock feeders have already booked 1.5 mln tonnes of DDGS. They can use up to 40 per cent in livestock rations and the price is getting cheaper as U.S. corn values fall.

Right now, U.S. ethanol producers are all making a profit and are producing ethanol at maximum capacity which means that they have large amounts of DDGS for sale which can be sold at discounted prices. This has taken the edge off barley prices.

While it is disconcerting to see grain and oilseed prices fall, this is a normal seasonal development that starts in July with prices not rebounding till harvest time.

– 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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