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Thursday, 27 October 2011 14:20

Grain values decline in latest CWB outlook for 2011-2012

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The CWB today released its October 2011 Pool Return Outlook (PRO) for the 2011-12 crop year.

Wheat values have declined from last month's PRO between $10 and $20 per tonne, depending on class, grade and
protein level.

Milling durum values have decreased by $13 per tonne.

Malting barley values have gone down by $18 to $19 per tonne since last month, while Pool A feed barley is down by $17 per tonne.

CWB Commentary

The world economy remains under pressure, with the resulting volatility and
uncertainty continuing to impact both commodity and currency markets. The
European Union (EU) continues with its attempts to resolve the Greek debt
crisis amid fears that Greece is simply the first scene of a multi-act
story, potentially involving several members of the EU and requiring large
sums of money. The EU banking sector has been negatively impacted, and
there are legitimate concerns that capital inflows for commodity markets
could suffer. Initially, these fears sent money in search of a "safe haven"
and the U.S. currency appreciated. However, since the start of October,
foreign currencies have recovered much of the September losses.
Announcements today that Euro zone leaders have struck a deal to limit
damage from the economic crisis is impacting the relationships with the
Canadian dollar and other currencies. The Canadian dollar is strengthening
relative to the U.S. dollar but has lost ground to the Euro and the
Australian dollar, all of which are important factors for international
grain prices. Details around the EU deal are still to be worked out and
there remains considerable skepticism in the market about the effectiveness
of the agreement. At time of writing, with the level of uncertainty present
in world markets, the CWB has not factored in this latest development.
However, as it currently stands, a stronger Canadian dollar versus the U.S.
dollar is generally negative for Canadian-dollar pool returns, while the
stronger European and Australian currencies versus Canada is generally
positive for our Canadian-dollar pool returns.


Grain futures have fallen significantly since the last PRO. Corn, Chicago
wheat and Kansas wheat March 2012 futures are down close to 75 cents per
bushel. December 2011 futures contracts have followed a similar trajectory.
The only exception to this trend has been the Minneapolis December
contract, which has appreciated and broken away from the wider market. It
must be stressed that there is virtually no trade-off of the December 2011
Minneapolis futures contract both in terms of offshore and North American

Longer-term supply-and-demand balance issues have started to pressure wheat
prices. The U.S. Department of Agriculture (USDA) issued its World
Agricultural Supply and Demand Estimates (WASDE) on October 12. World wheat
2011-12 ending stocks were estimated at 202 million tonnes or a 30-per-cent
stocks-to-use ratio. Production in 2011-12 is estimated at 681.2 million
tonnes, which is the third-largest crop on record and a small fraction
below the 2009-10 record production of 684.4 million tonnes. Looking
forward to 2012-13, there is a strong likelihood that stocks will build
once again. Wheat will need to rely on outside factors to maintain current
values. However, most of these variables support declining prices.

A second significant factor weighing down wheat values is the distribution
of world wheat supplies. Last year, Russia, Ukraine, and Kazakhstan (Black
Sea) all experienced varying degrees of crop failure. The end result was
that the Black Sea bloc exported only 11.9 million tonnes in the 2010-11
marketing year. This year, the Black Sea region is forecast to export 33.5
million tonnes. In general terms, world wheat prices are negatively
impacted by large-scale Black Sea exports. Crop conditions in Australia are
favourable for both large volumes and high quality. To illustrate, West
Australia is expected to harvest upwards of 9.5 million tonnes and to
export seven to eight million tonnes. Drought in West Australia last year
significantly limited exports from that part of the country. There is
little doubt that Southern Hemisphere production and exports will provide
additional pressure on world wheat prices.

Corn continues to provide support for the entire grains and oilseeds price
structure. The October WASDE held the corn yield estimate at 148.1 bushels
per acre. There was a small downward adjustment in both planted and
harvested acreage. The production estimate is for a 12.43 billion bushel
crop. Demand is estimated at 12.71 billion bushels. Given that the USDA had
previously increased 2010-11 ending stocks to 1.13 billion bushels, the
impact of demand exceeding supply is mitigated and 2011-12 U.S. corn ending
stocks are forecast at 866 million bushels--almost 200 million more bushels
than the September estimate. In the world coarse grain market, larger
Southern Hemisphere production and exports will provide a counterbalance to
any U.S. corn supply squeeze.

The PRO is the forecast of the final pool return. It includes the estimated
value on grain that has already been priced, and the forecasted value on
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 30 per cent of the expected 2011-12 crop year deliveries of
wheat. It is expected that the wheat pricing level will reach approximately
50 per cent by the end of December.

Durum prices have moved down this month in lock-step with declines in the
broader market. Yet, overall, durum prices remain historically high. The
U.S. crop is estimated at 52 million bushels and the overall U.S. export
program is forecast at only 20 million bushels. Canadian production is
estimated at just above four million tonnes. North American prices remain
strong and provide ample incentive for a large desert durum crop to be
planted. Longer term, historically-high durum prices should encourage an
increase in spring planted acres as well. Both the Canadian dollar and the
euro have rebounded after a precipitous fall to end September. Buying
demand remains strong in the Mediterranean basin for durum and, relative to
last month, the stronger euro has had the dual effect of reducing EU
competiveness and increasing their buying power for North American durum.

Feed barley
Offshore feed barley values have declined close to $30 per tonne over the
last month due to quiet Middle Eastern demand and larger Black Sea
supplies. FOB values decreased significantly in Russia and Australia,
driven down in anticipation of larger supplies. Although feed values are
forecast to continue a slow decline as new production makes its way to
market, prices will see some upside potential, driven by periods of demand
from Saudi Arabia. Domestic feed barley values in Western Canada are
supported by smaller domestic production and reduced availability of feed
wheat supplies. This combination of weaker international values and
stronger domestic values will limit opportunities to market feed barley
onto the international market.

Designated barley
International malting barley values have decreased over $70 per tonne in
the last month as Australian exporters have begun to aggressively market in
anticipation of a large, good-quality malting barley crop. Argentina is set
to harvest a record barley production and will be an aggressive marketer by
the last half of November. With harvest beginning there in the next month,
quality risk still exists, but becomes smaller as each day passes. La Nina
is forecast to strengthen over the next few months, increasing the
probability of harvest rain in Australia. Once the Southern Hemisphere
harvest is completed, prices will face further pressure as exporters
compete for market share into key markets such as China. In the U.S., as a
direct result of its smallest barley crop since 1936, increased import
demand will keep North America a high-priced island for the remainder of
the year.

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