The Rural Voice, 2006-03, Page 44Grain Markets
Februarg markets show surprising strength
Dave Gordon
is a
commodities
specialist
with LAC,
Inc., Hyde
Park, 519-
473-9333.
By Dave Gordon
February 20, 2006
The month of February is usually
a drab and dreary month and grain
prices are generally quite weak. But
this year, futures volumes have been
relatively good while corn and
especially wheat futures have
sustained some reasonably good
strength. One of the obvious reasons
for this strength has been the drought
in the southern U.S. plains, which has
caused the Kansas City wheat futures
to move higher. But there are many
reasons that not so apparent. I have
mentioned at times that corn is too
cheap relative to oil if it can be used
as a heating source in place of gas
and we also need to look at how
cheap corn is relative to cattle and
hog prices.
CORN:
The USDA reduced expected
carryover in their latest report, but
probably not to the extent that many
analysts think it should be. Corn
usage by the ethanol industry was
increased by 25 million bushels but I
think exports should be increased as
well. Weekly export sales have been
outstanding over the past four to five
weeks reflecting the relatively cheap
price of corn and the USDA
projection of 1.85 billion bushels
should easily be surpassed.
The USDA is projecting some
tentative 2006-07 numbers as well.
They are assuming a drop in corn
acres of only 1.5 per cent but the
increase in projected ethanol demand
is a whopping 36.5 per cent or 575
million bushels. This is a huge
assumption on the part of USDA as it
takes total use to an unprecedented
11.5 billion bushels of corn.
40 THE RURAL VOICE
In Ontario, basis levels slipped
again in the past month but are still
showing at least a $.10 premium to
U.S. corn without the countervail. If
the rumblings we are hearing are true,
both governments are working
quickly to get a safety net program
put together. At any rate, the CBSA
(Border Service) will come out with a
ruling on March 5, 2006, which will
be followed by public hearings where
all parties can argue their case before
the trade tribunal. As I have stated
many times, the best scenario for the
whole industry would be a safety net
program that allows normal trade.
SOYBEANS:
The USDA's supply/demand
report showed a huge increase in
soybean carryover of 50 million
bushels due to a drop in exports and a
lower crush figure. I do not think this
increase was totally unexpected since
China has been the only decent buyer
in the export market and some North
American processors continue to
operate at a reduced crush.
Now that the supply/demand news
is in the market, we need to look at
the South American crop and then at
what crop the U.S. farmer will plant.
So far, the soybean crop in South
America has escaped any prolonged
drought but many analysts are
lowering their production estimates
slightly as originally thought but this
could be due to the relatively dry
weather. There have been a lot of
individual rust sites found but luckily
the acreage involved is not too
substantive yet.
In Ontario, basis levels are holding
reasonably well considering how
much is still in storage. We are
constantly surprised at the amount of
soys still sitting in farm bins at this
time of year. Basis levels simply will
not hold forever in the face of these
beans s hitting the market as well as
the continued strength in the
Canadian dollar.
I am sure the big news in the
coming weeks will be about a safety
net program. We hear that the wheels
are turning quickly between Toronto
and Ottawa but until the federal
governments agree to a deal, nothing
will get done. We need to keep in
mind that a program will include
pretty well all grains and oilseeds. I
also believe that the fate of the
countervail duty on U.S. corn lies in
the success or failure of getting a
safety net in place.
The USDA Outlook conference
just wrapped up and as expected, they
took a very conservative approach to
projected acreages and yields. They
decreased corn acreage by two
million acres and, of course, they
stuck with trend -line yields.
After the latest USDA
supply/demand report, which was not
exactly bullish, I was surprised to see
that prices held quite well and in fact
have moved a little higher.
Remember, this is February and
markets are not supposed to have any
strength, but here we are closing in
on March and grain prices are
holding a level that makes me wonder
if the lows are not in for wheat and
corn.
It is hard to be bearish on grains
when wheat futures are on such a roll
and with drought still holding in the
souther plains, it will take a total turn
around in weather patterns to stop
wheat prices from rising. Add in the
hedge and index funds which
typically play from the long side and
you have the potential for further
prices gains.
Corn futures are at their highest
point since last August and wheat
futures are at an 11 -month high using
the lead month. Granted, U.S. corn
and wheat stocks are high but for
once, the futures prices are moving
against this particular fundamental. I
think this bodes well for prices in the
coming months but there is no reason
to think that market prices will go
straight up in the short term.
The main thing that will bite
producers in the coming months in
my mind will be the strength of the
Canadian dollar. As long as oil and
gold prices stay hot, the loonie should
maintain its strength.°