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Situation report
September 2008

Year-end Canadian grain stocks

Canadian all wheat stocks at July 31, 2008 decreased almost 30.0% from July 2007 to a modern-time low.  The decline was the result of lower supplies combined with strong export and steady domestic demand.  In contrast, stocks of oats increased significantly to more-normal levels as a result of higher 2007 production and lower feed demand. Higher barley production coupled with lower domestic demand led to a 5.4% stocks increase over 2006/2007 despite very strong feed barley exports.  Farm stocks approximated the previous year’s low level; however, there was an increase in commercial stocks.  There were large 2007/2008 supplies but canola ending stocks fell to a three-year low at July 31 because of strong exports and record crush demand.  After three years of strong increases, flaxseed stocks dropped 53.6%, a result of lower production and steady exports.

Soybean stocks at August 31, 2008 fell 74.0% from August 2007, the result of lower supplies.  In contrast, corn stocks increased from last year mainly because of record production and very strong imports and despite increased feeding and industrial use.

Decreases in world production and increases in export bans led to greater demand for Canadian pulses in the world market.  As a result of large exports into the human consumption market, dry pea stocks ended the 2007/2008 year at levels slightly above the 2006/2007 stocks, even though production was higher.  Lentil supplies were significantly reduced, leaving supplies tight to begin the 2008/2009 crop year.  Mustard stocks continued to decline after another year of reduced acres and lower production.  Stocks were at one of the lowest levels seen in the last five years.  Reduced carry-in stocks and an increase in exports combined to lower 2007/2008 year-end stocks of canary seed below the previous five-year average.  Sunflower stocks maintained their low levels as exports continued to remain high and a reduced acreage resulted in lower production for the 2007/2008 crop year.  Chickpeas was the only special crop to see an increase in stocks as an increase in production and a slower export pace resulted in July stocks being above the five-year average.

US and World supply-demand

The U.S. Department of Agriculture (USDA) reduced its September projection for 2008 US corn production by 5.5 million metric tonnes to 306.6 million metric tonnes from August because of smaller-than-expected yields.  The forecast 152.3 bushels per acre was down 2.7 bushels from August due to dryness throughout much of the Corn Belt.  If realised, corn yields still would be the second highest on record behind 2004, while production would be the second largest behind 2007.  The USDA also reduced its prediction for corn ending stocks to 25.9 million metric tonnes, down 11.3% from August.  World corn production for 2008/2009 was projected at 783.0 million metric tonnes, down from the August forecast of 789.6 million metric tonnes.  World corn ending stocks were 782.6 million metric tonnes.

US soybean production for 2008/2009 was projected at 79.8 million metric tonnes down 1.1 million metric tonnes from August, the result of lower yields.  If realised, soybean production would be the fourth largest on record.  US ending stocks remained the same as last month at 3.7 million metric tonnes while the crush decreased to 0.8 million metric tonnes.  World 2008/2009 soybean production was projected at a record 238.0 million metric tonnes, up 9.0% from 2007/2008.  Argentina soybean production increased to a record 50.5 million tonnes based on higher expected area.  China also increased its projected production to 16.5 million metric tonnes based on increased yields.  World ending stocks were 51.2 million metric tonnes, up 4.0% from the August projection.

The US wheat balance sheets were unchanged in September from August.  However, world wheat production for the 2008/2009 marketing year was projected at a record high of 676.3 million metric tonnes.  This increase of 5.5 million metric tonnes resulted from a stronger-than-expected harvest in the European Union, Russia and Ukraine.  World wheat ending stocks increased 2.7% from August to 139.9 million metric tonnes.

On September 30th the USDA released its quarterly US Grain Stock Report which sets 2007/2008 US corn and soybean ending stocks.  Old crop corn stocks on September 1, 2008 were up 25.0% from last year ending stocks.  Old crop soybeans ending stocks they were down 64.0% from last year.   Both estimates were above traders’ average expectations.

2008/2009 Harvest

By the end of September, farmers in western Canada had harvested 70.0% of all 2008 crops; progress was slightly less than a week behind normal.  In the Prairies 69.0% of spring wheat and durum crops and 80.0% of barley had been harvested.  The quality of wheat crops is reported to be average. Saskatchewan and Alberta had harvested almost half of their canola, while Manitoba was at 30.0% completion.  In Ontario a small percentage of fields had been harvested, mainly in the southwest and the area north of London.

Prices

Prices were generally volatile over the month of September.  Wall Street was shaken this month by the collapse of investment banks such as Lehman Brothers. The US government took over American International Group Inc. (AIG), one of the world’s largest insurers while Merrill Lynch was bought by Bank of America to save it from bankruptcy.  Pressure on markets increased with the collapse of Washington Mutual, the biggest US bank failure, which was taken over by JPMorgan Chase.  Furthermore, European banks’ stability was also questioned as giant Fortis announced it was being propped up by governments in Belgium, the Netherlands and Luxembourg.  The United Kingdom's mortgage lender Bradford & Bingley was nationalized, while the German government was injecting cash into Hypo Real Estate one of its major financial institutions.  By the end of September the US government was planning to spend up to $700 billion through the Emergency Economic Stabilisation Act.  Its main objective was to prevent credit from drying up and causing a meltdown of the US economy.  However, the House of Representatives defeated the White House's historic financial rescue package. This was a surprising turn of events that sent the stock market into a tailspin.  The Dow Jones Industrial Average and the Toronto Stock Exchange sustained their biggest point drops in history.  The grain trade is closely linked to international financial markets for currency, credit and for other commodities.  Consequently these extraordinary events created high levels of instability and uncertainty in all markets including grains and oilseeds.

The Canadian Wheat Board (CWB) released its September 2008/2009 Pool Return Outlook (PRO) on September 25th.    Wheat values decreased $27 and $31 a tonne from the August PRO, while durum values were down between $5 and $31.  Designated barley declined by $13 a tonne from the September 11th mid-month PRO.  Feed barley dropped by $23 a tonne.  According to CWB the crisis in world financial markets pressured down futures’ prices over the month.  On September 25th, the CWB also released its final PRO for the 2007/2008 crop year.  Wheat prices ranged from an increase of $2 to a decline of $3 a tonne from the July PRO. Milling durum values were up between $6 and $12 a tonne.  Designated barley values went up $4 whereas feed barley declined $3.

US wheat futures’ prices continued their decline which started at the end of August.  During the first half of the month wheat prices spiralled down.  Pressure from the record 2008/2009 harvest and nervousness of financial markets contributed to the decline.  During the last week of September wheat prices bounced back borrowing strength from crude oil and gold while a weaker US dollar boosted the markets by giving foreign importers more purchasing power.  However, by the end of the month prices declined again because of the rejection of the US government’s plan bailout of the financial sector.

In September, corn futures’ prices were highly volatile but performed fairly well.  They held well above their August lows during September even with the instability of the financial sector.   Higher crude oil prices and US government action appearing to calm the financial markets, such as the take over of AIG, were among the supportive outside factors.  By the end of the month though, corn futures’ prices decreased as a result of the economic instability and lower demand.

Soybean futures’ prices were also highly volatile throughout September but the general direction during the month was down. Soybean prices bounced back in late September based on stronger crude oil prices but then declined by month-end mainly because of the ongoing turmoil in the financial markets.

In September, Winnipeg canola futures’ prices continued the decline which started in mid-July.  At the end of the month, canola was pressured down by the market’s instability, lower crude oil prices and by the massive crop under harvest in Canada.

Good harvest progress, better than expected yields, and large inventories all combined to put downward pressure on field pea prices during the month.  Demand for yellow peas from state trading companies in India slowed, forcing exporters to look to alternative markets at lower prices.  Prices were also forced to decrease to levels which would make peas more competitive with other food choices.  Green pea prices remained steady throughout the month, maintaining a premium over yellow peas.  Potential quality problems and smaller production continued to support the market.  Feed pea markets saw increased interest as harvest progressed and producers wanted to move product.  Feed pea buyers returned to the market as harvest pressure and quality concerns pushed prices lower.

Lentil markets eased off their recent highs, although they continued to trade above their five-year average.  Increased harvest selling pressure and quality concerns combined to push prices lower in the short term.

Limited producer selling helped to hold chickpea markets steady in Canada.  Processors hoped that a smaller crop and a general decline in field crop prices would encourage more producers selling throughout the current crop year.

Mustard prices remained unchanged during the month as the market waited to see how the harvest progressed and yields came in.  A smaller than expected harvest could result in prices moving back up into record high levels in an attempt to ration demand.