The wheat, durum and feed barley price forecast improved in the Canadian Wheat Board’s October Pool Return Outlook released Thursday.
Wheat rose by $7 to $15 per tonne, durum rose by $15 to $16 and feed barley by $5. Malting barley was unchanged.
Most types of wheat generally rose by $8 per tonne.
No 1 CWRS wheat rose to $308 per tonne at port from $300 in the September PRO.
No. 3 CWRS wheat rose to $250 from $242.
Feed wheat rose $15 to $230 per tonne at port.
No. 1 durum 13 percent protein rose $15 to $272. No. 3 durum rose $16 to $239. No. 5 durum rose $16 to $222.
Pool A feed barley rose $5 to $232. Pool B feed barley was introduced at $228.
The following is the CWB commentary that accompanied the PRO.
Wheat
Corn is again providing leadership to agricultural commodities. A drastic month-on-month reduction in the yield outlook for the 2010-11 U.S. corn crop has resulted in a critically tight U.S. corn supply-and-demand balance. This sparked a significant agricultural commodity rally. In particular, an early onset of the 2011-12 acreage battle between soybeans and corn engulfed the Chicago futures market.
Since the September PRO, futures values have narrowed in the nearby and risen in distant months. This has put a considerable carry into the market, with December 2011 wheat future contracts on all three exchanges trading at around $8 per bushel. In the nearby positions, the quality spread continues due to a relative lack of quality in the 2010 world wheat crop. Quality results in Canada continue to be sub-optimal and prospects for Southern Hemisphere crops do not suggest that the world wheat quality profile will be enhanced. Thus, the spreads between classes and protein levels are expected to remain above average throughout 2010-11.
Over the last month, and especially since the U.S. Department of Agriculture’s (USDA’s) World Agricultural Supply and Demand Estimates (WASDE) report was released in early October, the spread between wheat and corn has narrowed. The October WASDE followed on the heels of a USDA Grain Stocks (Sept. 1) report that unexpectedly increased the 2009-10 U.S. corn ending stocks by 300 million tonnes. The October WASDE counterbalanced the bearish impact of the Grain Stocks report by reducing the U.S. 2010-11 corn-yield forecast from 162.5 bushels per acre to 155.8 bushels per acre. As a result of the production decrease, U.S. corn ending stocks are forecast at 902 million bushels, well below the theoretical safety valve of 40-plus days of use. Corn futures have responded by appreciating significantly.
Corn futures are closing in on $6 per bushel. Without a significant reduction (rationing) in corn usage, prices must continue to increase. Soybeans have taken firm note of the corn advancement and responded with a swift rally, trading almost $2 per bushel higher month-on-month. This has ignited the acreage battle earlier than expected, as both corn and soybeans jockey to increase their respective acreage bases. Since price is the primary instrument by which demand gets diminished, expectations remain that corn must keep appreciating to stem both exports and domestic usage. The ultimate goal would be to both buy acres for 2011-12 and slow nearby demand such that 2010-11 ending stocks are lengthened.
Wheat benefits because the price floor has been considerably increased. Overall, world wheat supply remains adequate, and early forecasts call for 2011-12 production to exceed consumption. However, any production problems in 2011-12 will provide support for prices due to the short crop in 2010-11. Already, lack of moisture in the U.S. hard-red-winter area has offered strong support for both nearby and further-out futures positions. Export restrictions remain in place in Russia and it does not appear that wheat from the Black Sea region is going to play a significant role in world trade. The U.S. and the EU are expected to pick up the slack. Traditionally, an increased proportion of world trade from those two sources has a positive correlation to world wheat prices.
Looming for late November and December is the Southern Hemisphere wheat crop. Thus far, results have been mixed in Australia. Western Australia is looking at perhaps its worst crop in a decade, while the eastern part of Australia is looking at a near-record production volume. However, poor weather has affected early harvest and continued adverse weather conditions will hamper quality results and downgrade production to feed status. Prospects in Argentina are for a relatively large crop and a small increase in export potential. However, the onset of Southern Hemisphere wheat exports will have a limited depreciative effect on wheat futures as long as the U.S. corn supply-and-demand balance remains critically tight. Also offering support is very strong Chinese demand for oilseeds and their products. Soybeans, while not to the same extent as corn, have been supportive of other agricultural commodities.
Macro-economic factors continue to send mixed signals to the commodity markets. On the one hand, Western economies remain focused on creating conditions for recovery without igniting inflation. The U.S. seems to have focused on the former by continuing to pursue a loose monetary policy. This has the dual result of an increased money supply and a weakened U.S. dollar. China, unambiguously the second-most important economic power, has responded to internal inflationary concerns by attempting to devalue its own currency. The so-called “currency wars” have clouded prospects for an organic recovery and have increased volatility. Uncertainty will remain while the major economies try to strike a balance between growth and stability.
Price pace: The PRO is the forecast of the final pool return. It includes the estimated value of grain that has already been priced as well as the forecasted value of grain that has yet to be priced. The CWB prices wheat on a pace that is approved annually by the board of directors. The futures and options markets are used to moderate faster or slower cash sales to ensure pricing follows this pace. At the time of this PRO, the CWB has priced approximately 31 per cent of the expected 2010-11 crop year deliveries of wheat. A pricing level of 60 per cent is anticipated by the end of January.
Durum
It is becoming increasingly clear that the world’s tradable durum supply is going to be short of higher quality. The Canadian crop was adversely affected by frost and rains during August and September. The end result is a 2010-11 Canadian durum crop that will be heavily tilted towards No. 3 Canada Western Amber Durum (CWAD), along with a sizable quantity of durum that will grade out as Nos. 4 or 5 CWAD. This means that the exportable supply of food-quality durum from Canada will be reduced. This is bullish to the durum market.
Overall world production is forecast at 34.7 million tonnes and Canadian durum production is forecast at 3.3 million tonnes. Overall Canadian supply is bolstered by 2.7 million tonnes of carry-in stocks. There is sufficient Canadian quantity to satisfy world demand but it will be a challenge to accommodate all of the customers that desire Nos. 1 and 2 CWAD.
Durum prices continue to be influenced by the ongoing bullishness in the corn markets. The rapid appreciation in both corn and soybean futures has provided a very firm floor for agricultural commodities in general. The continuation of the “acreage battle” into the new year will offer support for wheat in general and for durum by extension. As corn strives to ration demand utilizing price, market opportunities will be available for alternative feed grains. This includes beneficial offshore outlets for feed-durum sales.
The euro continues to play a critical role in the durum-price outlook. The euro has been strengthening over the last month and has recently traded through the $1.40 US threshold that seemed so elusive during the summer. A stronger euro has a positive impact on EU import demand and a negative impact on EU export competitiveness.
U.S. durum exports have been relatively slow this year in comparison to the presumed supply of durum in farmer hands. Farmers have remained reluctant sellers given the discount to spring wheat that remains in place at the country elevators. As the corn and soybean export programs ramp up and the winter closure of the St. Lawrence Seaway approaches, durum export capacity will be limited until spring 2011.
Feed barley
On the barley front, there have been no fundamental changes in the world supply-and-demand, and international barley prices have held their value. In terms of new information coming to the market, Ukraine has (after months of non-tariff trade restrictions) implemented export quotas until Dec. 31, 2010. Russia then announced it is extending its own export ban to July 1, 2011. This has effectively removed the cheapest source of feed barley from the market, which will support barley prices throughout the crop year.
A more bearish indicator is prospects in Australia for bumper crops in South Australia, Victoria, and New South Wales. Even though Western Australia has been undergoing extreme dryness, Australian barley production is still forecast to be above eight million tonnes. The market impact of Australian barley will be affected by harvest weather over the next two weeks and its impact on quality. The current strong Australian dollar will help support FOB values. However, this new supply of barley will shape values from January onward. While feed barley demand is forecast to remain relatively strong in markets such as the Middle East and Asia, many other markets will have the opportunity to switch to other feed grain options that have become available this year due to poor harvest conditions in the Northern Hemisphere.
Designated barley
Malting barley supplies are tight this year. With the late harvest, the quality and selectability of western Canadian malting barley is still being evaluated. However, it is clear that Canadian supplies are going to be much tighter than we have seen in recent years. Until the quality of the crop is determined by the selection companies, it will be difficult to estimate the potential impact on sales and pool returns.
Europe also experienced a disappointing harvest and the total amount of available malting-quality barley is significantly lower than in the past two years. The Australian barley crop is on track to be their largest in several years. If weather cooperates and the quality is good, it has the potential to put significant pressure on world malting barley prices. However, recent rains in eastern Australia are causing concern about the eventual amounts of malting barley available. Another factor will be the logistics in eastern and southern Australia, where barley will compete with record wheat production for capacity in the export pipeline.
On the demand side, customers have been slow to buy at current values. The largest global customer, China, has slowed purchases of new-crop malting barley, and will likely await new-crop Australian malting-barley supplies before resuming major purchases.
