The Farm Marketer’s Link

By Steven Perrin, Marketing Advisor, Rivers, Man.
This week the CWB released their first Pool Return Outlooks for the 2010/11 crop year. While too much weight can’t be put upon these initial estimates, they can change dramatically and the final payments for that crop year are still nearly two years away, they do give us some insight as to the what the CWB anticipates for the coming crop year.

The projected values for 2010/11 were generally modestly lower than the current 2009/10 PROs for most classes of wheat, durum and barley, reflecting an overall environment that remains burdened by large supplies worldwide, but where much of the bearish fundamentals are already largely factored into values.

CWRS values were lowered for #1 grades, including a $6/MT drop from the current year for the benchmark #1 CWRS 13.5% to $236/MT in-store. The decline for 14.5% protein was a more substantial $17/MT, while some of the lower grades actually saw an increase, resulting in a significant tightening of protein and quality spreads projected for the coming year. We could see the CWRS PROs work higher from these levels if we can sustain some moderate strength in U.S. futures markets, which would be largely dependent on spillover strength from better corn prices.

The PROs for some of the mid-quality grades of wheat, such as CPS and winter wheat, actually showed a higher PRO than the current level for the 2009/10 crop year. This is partially a reflection of the fact that hard red winter wheat stocks in the U.S. are relatively tighter than for some other classes, along with the tightening of quality spreads to the higher quality and protein classes of CWRS.

The durum PRO showed a further decline from the already depressed 2009/10 levels, at $197/MT in-store for #1 CWAD 13.0%. This is also a $39/MT discount to CWRS, a record-wide level. Although the durum fundamentals remain bearish, particularly in the face of an increasing likelihood of another good crop in North Africa and Europe, this is also a signal from the CWB trying to discourage growers from planting this crop. Prairie durum plantings will be lower in 2010, but they are unlikely to be down by as much as many are expecting. However, we also expect that the durum PRO has little downside from these levels, and should likely be able to narrow its huge discount to CWRS over the course of the upcoming crop year.

The designated barley PROs were released at levels only slightly below the current year, at $208 and $190/MT in-store for 2-row and 6-row, respectively. This reflects a mostly flat outlook, as lower production in North America, Australia and Europe should limit the downside, while large worldwide stocks and uncertainty over demand growth keep prices from materially advancing. These prices will not be attracting many acres on the Prairies, which could result in potentially better values later in the crop year.

By Marvin Mills, Marketing Advisor, Boissevain, Man.
Marketing has become increasingly complex over the past several years. Volatility remains high and markets are complex, while an uncertain broader financial climate influences values in ways that seem to have little to do with traditional supply and demand fundamentals. The challenge of marketing crops is even more difficult in western Canada than in many other major grain production regions since our crop markets are so diverse, with each crop having their own unique market function, price discovery mechanism, and risk management tools.

For these reasons it’s more important than ever that farms have a well thought out and disciplined selling plan for their portfolio of crops for the marketing year. And although market predictions and specific price expectations are part of the process, the more critical part is anticipating and planning for the needs of your specific operation.

In a perfect world farmers would be able to make sales only in response to when the market is signaling for them to sell their crop, such as through strong prices or good opportunities for movement. But the reality is that most farms face internal pressures that require sales to be made at certain times of the year, such as a lack of adequate storage requiring sales in fall, or those periodic times when cash flow needs are particularly great.

Too often these operating needs don’t coincide with when the market is telling us to sell our crop, and in fact often occur during times when the market is specifically signaling for us to hold our crop back. Often in these times crop gets forced off the farm in reaction to the immediate need to move grain, resulting in less-than-optimal returns.

The worst part of these sales made out of necessity is that they are so often avoidable. Careful planning helps bridge this gap between market signals and operating need, particularly when they are conflicting. By carefully examining the specific situation of your operation, including storage constraints, cash flows, crop mix, risk tolerance, and the multitude of other factors that influence selling decisions, sales can be made ahead of time when the market signals dictate that sales be made.

Marketing planning also helps to deal with our complex and highly variable cash markets, including CWB grains, pulse and specialty crops, and crops that trade on futures markets. Each of these has very different characteristics, with unique aspects that can be utilized to meet the individual farm needs. However, this requires careful preplanning and understanding of what those internal needs are, without which chances to make potentially good sales can often be missed.

It’s easy to get bogged down in trying to forecast every twist and turn in the marketplace. However, effecting marketing involves much more than accurate price prediction. Having an understanding of all the variables that require your farm to move grain during specific periods of time, and then planning in advance for those needs, is the only way producers will know how best to respond to whatever action takes place in the market. The guidance and discipline that comes from a carefully designed and disciplined marketing plan should ultimately result in higher prices for the farm’s portfolio of crops while still meeting operating constraints, and do so in a manner that reduces overall risk and still leaves the opportunity to capture potential higher prices later in the year.

By Twila Miller, Marketing Advisor, Lipton, Sask.
On February 9 USDA released their latest demand and carryout estimates for the U.S., as well as revised figures for world production. The fact that no U.S. production figures were reconsidered in this report means that traders will continue to question how USDA will account for all the corn still left in the fields, but it does give us more insight into what their thoughts are for demand through the rest of the year.

The most anticipated number coming into the report was the estimated U.S. soybean carryout. USDA lowered the carryout to 210 million bushels on an increase to both the domestic crush and exports. Despite some analysts looking for potentially an even larger reduction, the number was mostly in line with expectations, and a reminder that U.S. soybean stocks will be very tight through the remainder of the crop year. There is also some speculation that the current robust pace of exports may find the USDA increasing the number even more in future reports, but the potential threat of Chinese switching current U.S. sales to South America in coming months is leaving others more cautious.

However, USDA also increased Brazilian production by 1 million tonnes, to 66 million tonnes, which is consistent with most outside estimates, and further confirmation that the combined South American crop that will be coming to market shortly is enormous. Despite the large size of the crop, there is potential for logistical problems to delay its availability to world markets, potentially pushing additional demand to the U.S. in spring. The soyoil figures came in a bit on the bearish side, with both U.S. and world ending stocks raised.

One of the pleasant surprises was a larger-than-expected drop in the U.S. corn carryout, which was drawn down to 1.719 billion bushels, a reduction of 45 million. Exports were reduced by 50 million bushels, which was widely expected based on the slow pace of movement so far, but a 100 million bushel increase in ethanol usage was more than what the market was looking for. While this still doesn’t result in a particularly tight market, it will be interesting to see how USDA reports production figures going forward since a portion of the crop is still in the field. It also confirms that the U.S. will need to increase corn acres for the 2010 growing season.

Globally, the Argentine crop was raised by 2.2 million tonnes, but an increase in demand resulted in the carryout falling to 134 million tonnes, leaving a stocks-to-use ratio of 16.6%, the third tightest in the past 34 years.

The wheat numbers were little changed, as the U.S. carryout was increased by 5 million bushels on an increase in imports. Changes to the global figures were negligible, with North American and world supplies still at heavily burdensome levels.

While most S/Ds show stocks at comfortable levels, today’s report reminds us that demand for most crops is strong. Increasing usage may not totally keep pace with the growth in supply, but it will keep traders sensitive to any potential threats to production through the next growing cycle.

By Ryan Bonnett, Marketing Advisor, Airdrie, Alta.
Like many crop markets, peas have come under pressure over the past few weeks, dropping up to 50 cent/bu or more across most prairie locations. While the recent drop in prices probably over exaggerates the fundamental reality, and represents more a case of buyers temporarily backing away from the market, there is an increasing risk of a shift towards a more bearish picture on the supply / demand balance.

The primary concern is about exports, and whether movement over the course of the crop year will be strong enough to keep ending stocks from building to burdensome levels. Official Canadian Grain Commission statistics, which do not include container traffic, show exports running only about 50,000 tonnes behind last year’s record pace. If sustained through the remainder of the year, ending stocks would get drawn down enough to be supportive to prices.

However, the market is concerned about the pace of sales going forward. India is by far our biggest export destination, and so far they have done a good job of keeping exporters off-balance with their intentions, which is preventing grain companies from coming in the market for a big round of buying as was seen in previous years. This would also cause the market to pop higher. In addition, India’s winter pulse crop is reportedly in good shape, and price of Chana, with is what peas substitute in their diet, have fallen over 20% since November. Other key destinations such as Cuba and Bangladesh have also been slow in early season purchases.

Most analysts are now projecting a 2009/10 pea carryout of between 600,000 to 700,000 tonnes, which is generally higher than earlier estimates and starting to get on the heavier side, even given the higher level of demand over the past two crop years. The somewhat more bearish revisions aren’t necessarily that dramatic in themselves, but when combined with the shift in market sentiment they’ve helped to push cash prices lower. In addition, the longer that sales are slow, the closer we get to the summer months when lower priced French and Ukrainian supplies will put additional pressure on Prairie values.

While producers may need to revise their price expectations lower, we are not as bearish on the yellow pea market going forward as some others. With 6 months left in the marketing year, there are several things that could help this market going forward. For example, even a moderate increase in export movement beyond current projections would have a meaningful impact on lowering ending stocks. In fact, this would not be totally unexpected, since peas are a relatively low-priced pulse crop, and food inflation continues to run high in Indian and other importing countries, while Canada is the only major global supplier of peas for the next four months.

Marketing is about striking a balance between managing downside risk and upside potential. Growers that are behind on sales should use any kind of price rebound to do some catching up, since the pea market does have its risks going forward. However, the potential is there for positive surprises as well, meaning growers should be holding some inventory back in the event of better prices in the coming months.

By Dan Hawkins, Marketing Advisor, Swift Current, Sask.
After failing to break through upside resistance in late December, canola futures have come under heavy pressure. The March futures contract dropped nearly $40/MT in just eight trading days between January 6th and 18th, although has since stabilized within a $10 - $12/MT trading range near the $375/MT support level that has held through previous selloffs. While all grain markets sold off sharply after the bearish USDA report in January 12th, the canola market actually started its brisk decline in the days leading up to the report.

Aside from a negative USDA report, adding to the bearish sentiment is a South American crop that seems to be getting bigger by the hour, as well as a shift in investor sentiment away from commodity markets in general as the U.S. dollar has rebounded. Additional speculative selling has shown up as too many traders got caught on the wrong side of the market with long positions.

While the fundamental scenario for vegetable oil markets has certainly turned more bearish under virtually ideal growing conditions in South America, canola prices should continue to find support at or near their current levels. That’s not to say that another wave of speculative selling won’t temporarily push futures markets through support and make another leg lower, but rather that the fundamentals don’t justify values staying at substantially lower levels for any sustained period of time.

Our current projections are for a 2009/10 carryout of less than 2 million tonnes, a level that is adequate, but not burdensome. However, we do have to be cautious of the risks to both export and crush demand falling short of our current expectations. Any decrease in either figure would fall straight into ending stocks.

The current pace of domestic crush continues to run 100,000 tonnes behind last year, whereas our current estimate is looking for a sizeable increase. While crush should increase as the year goes along with new capacity coming online, the disruption of canola meal exports to the U.S. due to the salmonella issue has been a hindrance. If the pace doesn’t increase in the next month or two, then we may have to revise our figure lower.

In addition, we also see some potential risks to our export total as well. The current pace of exports is running ahead of what is needed to reach our figure for the year. However, these exports are heavily front-loaded with sales to China, a market that has since been disrupted by their blackleg restriction. The question is whether they will ease off their current stringent requirements, something that is likely, but perhaps only towards the end of the crop year. Other export markets are lagging a bit as well, although in all cases there is still time for sales to pick up to meet our targets, particularly as values have slid. At the same time, we can’t ignore the risks of exports coming up short.

Despite these risks, there should be opportunities to price cash canola at higher levels for those growers that can afford to be patient. Farmer selling will start to dry up if prices slip much lower, while end users will look to get more coverage as prices are perceived to have good value. In addition, much of the bearish news about the South American crop is already priced into the market, and eventually the fund liquidation will slow down. Local basis levels have started to improve, and should continue to do so if futures stay depressed, which may give growers the chance to achieve cash prices not far off what may have been available in December, even if it means pricing the futures portion at levels below the recent highs.

By Evan Erlandson, Marketing Advisor, Altona, Man.
When we look ahead for the coming year we expect producers will have opportunities to lock in profitable prices for most crops, provided they are disciplined in securing margins when the market offers them. The one crop, however, that will be a challenge for profitability is spring wheat. Most crops have seen some rebuilding of stocks over the past two growing seasons, but there are not many where supplies have gotten to the point of being as burdensome as wheat.

The recent USDA report reminded us again of the difficulties that wheat prices will have to sustain any meaningful rally. Even though wheat production was left unchanged, projected U.S. ending stocks were raised by 76 million bushels to 976 million on softer demand. This was largely due to lower exports, as large world stocks have created a highly competitive environment internationally, particularly from the Black Sea countries. Despite the fact that prices are substantially lower than the last couple of years, U.S. wheat is still too expensive compared to what world buyers can source their needs for elsewhere.

The picture doesn’t improve for the world balance either. Global ending stocks are projected to increase to 195.6 million tonnes, the largest since 2001, as total production got revised higher for the sixth consecutive month to 676 million tonnes, exceeding the expected 644.5 million tonnes of demand. To put this 30 million tonne production / demand difference into context, we could literally wipe out all of last year’s Canadian wheat production and the world would still have grown more wheat than it will use. The global stocks-to-use ratio has increased to 30%, from a level of only 18% just two years ago.

Not only are exporting countries sitting on excess supplies, but overall global wheat trade is projected to decline since many importing countries had large crops as well, reducing their required purchases.

All of this paints a situation where wheat prices will remain stagnant for the coming year, or longer, unless we have significant production issues across multiple production regions. Unfortunately for Prairie growers, the low-profitability prospects for wheat also hurts the outlook for other cereals, since the market doesn’t have to work as hard to coax in the acres it needs for crops like oats and barley.

However, as is often said, ‘the best cure for low prices is low prices’. Some signs of markets reacting to the current environment are surfacing. The same USDA report also showed that U.S. winter wheat plantings fell 14% this fall to 37.1 million acres, the lowest since 1913. Part of this decline was driven by the late corn and soybean harvest and wet fall conditions that prevented seeding, but part of it was also a response to market signals dictating that the world doesn’t need more wheat. This alone won’t change the overall wheat price environment, but more farmers worldwide responding to these economics will eventually pull supply and demand into a better balance, and with it the hope of more profitable returns in the future.

By Lance Barham, Marketing Advisor, Dugald, Man.
This week USDA released their latest estimates for production and demand for corn, soybeans and wheat. This report was watched with particular interest because it was the first time since November where they provided a revised figure on yield, with the market wondering what USDA would come up with given the late fall and the fact that a certain amount of the corn crop remains in the field.

Unfortunately for producers, the report was decidedly bearish, particularly for corn, but also for wheat. By far the biggest surprise was the size of the increase in the U.S. corn crop, which was pegged at 13.151 billion bushels, about 300 million more than what was expected. Harvested acres were bumped up modestly, but it’s the increase in yield to a massive 165.2 bu/acre that caught traders off-guard. Some of this was partially offset by an increase in feed demand, but the carryout estimate was increased to 1.764 billion bushels, whereas many were looking for a decrease.

World corn production and carryout was also increased, primarily due to the U.S. numbers but also helped by an increase in the Argentine estimate. However, the year-over-year world carryout is lower, and the stocks-to-use ratio is not burdensome.

The soybean numbers came in fairly close to pre-report estimates, with production adjusted a bit higher as bigger yields more than offset a small reduction in harvested acres. Increases in both crush and export demand were larger than the rise in production, so carryout fell to 245 million bushels, only modestly above what the trade was looking for. World production was increased as well, led by the U.S. and a 2 million tonne increase in Brazilian production, which was no surprise given the favorable growing conditions in South America, pulling the world carryout a bit higher.

Wheat also posted bearish old crop numbers, with the U.S. carryout increasing once again to a record 976 million bushels. The 2009/10 wheat production figure was unchanged, so the increase was driven by a decrease in demand, specifically exports and feed/residual use. Larger global production figures combined with a reduction in demand further added to the projected global carryout to 195.6 million tones, nearly 5 million tonnes higher than the December estimate.

The one small bright spot for the wheat market was that U.S. winter wheat acreage intentions came in below both the 2009/10 levels and what the trade was expecting. The burdensome U.S. and global supply situation means that much more significant reductions in production will be needed to make a meaningful impact, but smaller seeded acreage may help North American values somewhat.

There’s no question that the big corn number will change the market dynamics in the shorter term for many traders, as shown by the steep selloff in the days following the report. However, once prices have adjusted to this news, the focus will return to anticipated demand, the size of the crop in other key growing regions, the impacts of outside investment flows, and ideas on seeding intentions for 2010.

By Sherry Woods, Marketing Advisor, Elm Creek, Man.
Last week in this space we talked about why we are optimistic about the future for Prairie farmers, both in the coming year and beyond. Part of this optimism is driven by what many believe will be a period of sustained higher prices for agricultural commodities worldwide. Recently Deutsche Bank, a highly respected global banking and investment management firm, released a report titled “Ten Reasons To Go Long Agriculture” that showed why they feel agricultural commodities should remain strong in the foreseeable future.

The first two points are ones we touched on last week, specifically population and income growth, primarily in Asia, and mostly in urban areas. This will also lead to a steady decline in land dedicated to agricultural crops and increased water constraints, both of which lower production. The potential effects of climate change, and resulting predictions of increased frequency of extreme weather events, may also potentially threaten food supplies.

The concentration of exports for many crops from only two or three countries also lends itself to higher prices, since a production problem in a small number of regions can have a disproportionate impact on values. For example, the U.S., Brazil and Argentina account for nearly 90% of global soybean exports, while Malaysia and Indonesia account for a similar proportion of global palm oil exports.

The growth of the biofuel industry is a trend that has been well known for years. And while the pace of growth has slowed, the amount of grain used for fuel continues to increase. Government action by many countries has also been influential, particularly through short-sighted policies such as export bans and price caps during the shortages in 2007 and 2008, decisions that may popularly dampen domestic prices in the immediate term but distort the market signals that would encourage additional production and help increase supplies in the longer term.

These factors have also contributed to falling inventories for many crops. Large North American production this past year and expectations for a big South American crop in the coming months will alleviate some of the supply tightness, but the markets remain sensitive to any production threats.

Finally, the paper touts the merits of agricultural commodities from an investment standpoint. This includes the diversification benefits as part of a broader portfolio of securities, as well as the fact that agricultural commodities have not seen the same gains as other commodity markets over the past year, making them relatively undervalued.

The paper speaks to higher level trends, and doesn’t preclude the possibility of periods of depressed prices for shorter stretches of time in-between or for individual crops. It can also be a “red flag” when an investment class starts getting too much favourable attention from people not directly in the industry, and can sometimes be a contrarian indicator for more challenging times ahead. But some of the broader trends are certainly evident, and at a minimum it’s an indication of how the investment community views agriculture, and why we are likely to see capital continue to flow into our industry.

By Curt Larsen, Marketing Advisor, Yellow Grass, Sask.
While many people use the New Year season to reflect on the year that has just passed, we prefer to use this time to look forward to what the future might bring for 2010 and beyond. I think the mood for many farmers can be described as ‘cautiously optimistic’ for the coming year. Most crops are likely to show at least some profitability for the coming year, but at this point there are no obvious ‘home runs’.

Aside from a few notable exceptions, such as wheat and durum, most crop S/Ds are reasonably balanced, which means that supplies are fairly adequate but not burdensome relative to demand. This will provide something of a price floor to prevent values from slipping too low, since stocks are not large enough to allow buyers to get too complacent. However, there is also enough cushion to keep them from having to bid up for supplies (barring the obvious exception of the event of a significant production setback due to weather). This will leave the market once again highly sensitive to anticipated production levels throughout all the key producing regions, starting with the upcoming South American soybean harvest right through to the completion of the North American harvest near the end of the calendar year.

Looking further ahead we see a global landscape that will become increasingly competitive as regions such as the FSU and South America grow their production and flex their muscles in export markets. This will continue to put pressure on western world countries that are typically higher-cost producing regions, a phenomenon that will only increase in the coming years.

At the same time, demand continues to grow as well. Every year China pulls the equivalent of Canada’s entire population out of poverty and into the middle class, increasing demand for all commodities, particularly food. This feat is also taking place in India and throughout the rest of the developing world, at the same time as urban sprawl is reducing the amount of available arable land. And while we may not have a cost-of-production advantage, many of our competitors in global export markets are well behind us in terms of infrastructure, both physical and financial, and in the maturity of our marketing systems.

No doubt there will be challenges along the way. The most immediate is pulling out of the recent global recession, with the so-called ‘V-shaped’ recovery much less of a certainty than many in the financial press are predicting and hoping for. Other issues going forward include government regulations, as an increasingly urban population is getting more interested in where their food is coming from, and influencing agricultural policy along the way in a manner that is not always rational or beneficial to producers. Market issues such as price volatility, currency fluctuations and uncertain energy markets will be a permanent fixture of the future landscape, along with broader issues such as climate change and technological advances. All of these will have a direct impact on Prairie growers in one way or another, and the outcomes are far from certain.

But despite the challenges that are sure to come, we can’t help but be optimistic about not only 2010, but the future of Prairie farming in general. Those western Canadian farmers that are able to adapt to change and maximize efficiencies in production, management of capital and marketing will be able to compete and thrive in the global arena for years to come.

By Darcy Zander, Marketing Advisor, Carberry, Man.
After rallying sharply off the early November lows, canola futures have been trading in a remarkably tight range, with only $14/MT separating the highest and lowest closing values in the past month. The market has actually held up surprisingly well given the bearish fundamental news this fall and early winter, including the Chinese blackleg issue, the slowdown in meal exports to the U.S. due to salmonella, and the recent StatsCan production estimate that came in above expectations. At the same time, the market has repeatedly tried and failed to break through resistance at $424/MT on the March futures contract.

Although the latest StatsCan production estimate of 11.8 million tonnes will increase the projected 2009/10 carryout to 2 million tonnes or more on most analysts’ supply / demand estimates, supplies aren’t necessarily burdensome if demand can meet expectations. In the past this level of ending stocks would have weighed heavily on prices. However, the increase in demand in recent years from both exports and domestic crush requires that more supplies are needed to bridge the time from when the crop year officially ends on July 31st and when new harvest supplies are readily available.

Given that we more or less know the supply base for the coming year, and that the current supply / demand tables are fairly evenly balanced, the focus and attention will be on whether demand will be able to meet projected targets. Any shortfall in demand could tip ending stocks to the heavier side, which could weigh on prices.

So far exports to the end of October are on pace to meet our latest internal estimate of 6.3 million tonnes. However, the fact that exports are typically more heavily loaded earlier in the crop year, along with the impaired movement to China due to the blackleg issue, could put this figure at risk. At the same time, some canola is still finding its way to China, and other key destinations such as Japan, Mexico and the U.S. are typically more routine buyers and less vulnerable to seasonal variances, meaning that it would be premature to lower our figures at this time.

Another risk is a potential shortfall in domestic crush. Our current projections are for crush to increase by 650,000 tonnes over last year, whereas so far we are actually running slightly behind last year’s pace. However, additional capacity will continue to become fully operational over the year, and the easing of restrictions on canola meal shipments to the U.S. from some Canadian plants should help improve the numbers going forward.

If the market starts to feel that demand is falling short of projections at the same time what’s expected to be a large South American soybean harvest starts to get closer, then canola prices will come under pressure. At the same time, if the futures market can push through chart resistance levels, spurring some outside speculative money to come in, and the South American crop starts to look threatened, canola prices could make another leg higher, particularly if demand looks to meet or exceed the expected pace.