A Canadian grain industry analyst says farmers should brace for a market downturn.
Errol Anderson, author of the Pro- Market Wire newsletter, said slumping equity markets are a bad omen for commodity markets and farmers.
“If the equity world continues to sag it will unfortunately ripple into the commodity world,” he said.
“I think we’ve got a correction coming in the equity side. If that occurs then products like crude oil will go into a slowdown into 2012 and that will pull the crude prices potentially lower.”
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Anderson wouldn’t be surprised if crude prices fell to $80 US per barrel by mid-winter, down from today’s values of about $95 per barrel.
“That ultimately will affect all the grain markets,” he said.
Anderson can see corn markets falling into the $5 to $5.50 per bushel range, down from today’s values of about $7.
“Corn is the leader and canola will play follow the leader,” he said.
Anderson sees a $50 per tonne decline in canola values and advises growers to guard against that downturn.
“I can’t jump up and down more than this. These are good prices and we try to encourage growers to lock it up.”
If growers are reluctant to take on the production risk of a cash grain contract, they should consider buying a put option.
Growers can buy a put option at a cost of $25 per tonne that gives them the right to sell their canola for $580 per tonne. Assuming a $25 per tonne basis for fall delivery, that would result in a net of $12 per bu. with no delivery or production obligation.
“In this type of year this is just a superstar strategy. If these things expire worthless, that is fantastic because it’s pure price insurance,” said Anderson.
Canola demand is expected to be supported this fall by a poor European rapeseed crop. Oil World estimates the EU will import 3.1 million tonnes of rapeseed/canola in 2011- 12, supplanting Japan as the world’s largest buyer of the crop.
Oil World said the demand will be filled by product from Ukraine, Australia, Canada and others. But there will still be a two million tonne supply gap that will be filled by imported palm, sunflower and soy oil.
Canadian canola exports to the EU have been constrained by a lone GM canola trait that has not been approved by European regulators.
“This will be a key test to see if Canada will get some wiggle room into the European market,” said Anderson.
He thinks the rapeseed shortage could force the EU to relax its rules and allow in more Canadian product.
“This will be just an excellent test to see if that will occur. If it does occur maybe it will be the start of a bit of a breakthrough for Canadian canola.”
Anderson believes the strong EU demand will narrow canola basis levels but won’t impact futures values.
