Situation Report — May 2010

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March 2010 Canadian grain stocks

On March 31^st, total Canadian stocks of most major grains and oilseeds were lower than the previous year as a result of reduced crop production. Farm stock data were obtained from a Statistics Canada survey of farmers while commercial stock data were obtained from the Canadian Grain Commission and from Statistics Canada surveys of commercial enterprises.

Total stocks of wheat excluding durum were estimated to be 11.1 million metric tonnes, a decrease of 11.6% from 2009. This was also below the previous ten-year average (2000 to 2009) of 11.2 million metric tonnes. In spite of increased exports, total stocks decreased as a result of an 8.6% drop in production. On farm stocks decreased to 7.3 million metric tonnes while commercial stocks were higher than 2009 at 3.8 million metric tonnes.

On farm stocks of durum wheat rose 38.0% from the same period last year to 3.6 million metric tonnes. Commercial stocks were reported to be just over 1.0 million metric tonnes, a decrease of 11.0%. Ample world supplies have slowed export demand for Canadian durum. The Canadian Wheat Board has only called 60% of Series A and B contracts for durum wheat to-date, with very little movement expected going forward. Farmers have turned to domestic feed markets to reduce burdensome durum wheat stocks. As a result, the feed, waste and dockage estimate has shown an increase over the previous marketing year.

Total stocks of canola were estimated to be 5.4 million metric tonnes. Of this amount, 4.5 million metric tonnes were reported to be on farm while 0.9 million metric tonnes were in storage in the commercial system. China, a major destination for Canadian canola, has restricted imports since November. However, shipments have been able to maintain a pace that was slightly higher than for the same period in the previous marketing year. Combined with lower production, the strong export pace has reduced ending stocks below initial projections for the 2009/2010 crop year.

As a result of record production, total soybean stocks rose 14.4% from last year to 1.4 million metric tonnes. This was an increase of 30,000 metric tonnes over the previous five-year average (2005 to 2009). On farm stocks increased by 25.2% to 755,000 metric tonnes. Commercial stocks were 645,000 metric tonnes, up 4.0% from the same period in 2009.

Slow export movement resulted in an increase in total dry pea stocks in spite of a 5.4% decrease in production. Ending stocks totalled 2.1 million metric tonnes, up 17.0% from 2009. Lower commercial stocks and higher on farm stocks reflected the weaker export demand.

Meanwhile, strong demand from India has reduced lentil stocks to 310,000 metric tonnes for the August to March period, lowering the threat of burdensome stocks at the end of the marketing year. Commercial stocks equalled 65,000 tonnes while on farm stocks were estimated to be 245,000 metric tonnes.

World agricultural supply and demand

The United States Department of Agriculture (USDA) released its initial assessment of world crop supply and demand prospects for the 2010/2011 growing season on May 11.

Global wheat supplies were estimated to increase by 2.0% as larger beginning stocks were expected to more than offset lower expected production. Wheat production was estimated to be 672.2 million metric tonnes, a decrease of 1.0% from 2009/2010. If realized, it would be the third largest production on record. Exports were projected to be 129.2 million metric tonnes. Higher exports for Argentina and EU-27 (European Union) outweighed lower exports for Ukraine, Australia and Canada. Global wheat consumption was increased by 2.0% as larger global supplies supported growth in demand. Global stocks were estimated to be up 4.7 million metric tonnes from 2009/2010 to 198.1 million metric tonnes.

For the 2010/2011 crop year, global coarse grain was expected to be a record 1.13 billion metric tonnes. This was a 2.0% increase from 2009/2010. Higher expected global corn area and rising yields combined to increase estimated production to a record 835.0 million metric tonnes, up 26.5 million metric tonnes from last year. Corn imports and exports were projected to be higher as a result of the larger supply while corn consumption was expected to be a record high at 827.9 million metric tonnes. Global ending corn stocks were expected to be 7.2 million metric tonnes more than 2009/2010 and at the highest level since the 2000/2001 crop year.

Global oilseed production was increased 2.2 million metric tonnes from 2009/2010 to a record 440.0 million metric tonnes. Soybean production is expected to decrease to 250.1 million metric tonnes mainly due to lower production in Argentina and Brazil. Argentine soybean production was lowered as producers were expected to increase grain and sunflower seed plantings. In Brazil, lower projected yields decreased production estimates in spite of a small increase in harvested area. Yields had set a record for the 2009/2010 crop year but were expected to return to average amounts for the next year. Global production of high-oil content crops, such as sunflower seed and rapeseed, increased 5.0% from 2009/2010 as a result of increased harvested area. Overall oilseed supplies for the 2010/2011 marketing year were up 4.0% with an increase of 19.0 million metric tonnes in beginning stocks.

Ontario wheat growers receive funding

The Government of Canada announced an investment of more than $200,000 to help the Ontario Cereal Industry Research Council (OCIRC) expand the market for whole wheat and wheat-based foods. Funding was being provided by the Canadian Agricultural Adaptation Program (CAAP), a five-year, $163 million national initiative that aims to help the Canadian agricultural sector adapt and remain competitive.

The OCIRC will use the funding to identify wheat varieties that have high levels of antioxidants and other beneficial health ingredients, to develop new products using these wheat varieties and to evaluate health benefits after baking and storing the products. The OCIRC was established in 2004 with the objective to advance the knowledge of cereal science and foster innovation to increase the use of cereal grains for value-added processors in Ontario.

Alberta plant expanding into bio-products

Atco Midstream and Grow-Gen Energy announced a partnership to create Canada’s first integrated bio-refinery. The existing Grow-Gen biogas plant near Vegreville, Alberta will be expanded to convert organic wastes and wheat into green electricity, ethanol, and bio-fertilizer.

Currently, the plant uses manure from the neighbouring Highland Feeders cattle feedlot to produce biogas and green power. Locally grown high-starch wheat will be used to produce ethanol after the expansion is complete.

When fully operational, the plant is expected to generate 40 million litres of ethanol, 10,000 tonnes of premium bio-fertilizer and 2.5 megawatts of green electricity. The process is expected to be virtually waste-free. The residual grains will be fed back to cattle at the feedlot while the bio-fertilizer by-product will be sold to local farmers and oil and gas drilling companies for soil enhancement.

Funding for agriculture research

The government of Canada announced funding of $11 million to the Canadian International Grains Institute (CIGI) to support international expansion and market growth for Canadian farmers. Through the AgriMarketing program, the funding will help producers and processors increase exports of their products in the global marketplace. Support will be provided to activities for boosting international market development, brand building and industry-to-industry trade advocacy.

An additional $500,000 from Western Economic Diversification Canada will help CIGI retain a competitive edge with leading-edge tools and technology. The new equipment will help farmers and processors develop new products using the latest grain and food processing techniques.

Oil spill in the Gulf of Mexico

On April 20, an oil well blow-out caused an explosion on the Deepwater Horizon offshore oil drilling platform. The rig was located 64 kilometres southwest of the Louisiana coast. Eleven platform workers were missing and presumed dead and seventeen other workers were injured.

The ongoing oil spill, originating from a sea floor gusher in the Gulf of Mexico, threatened to disrupt shipping channels and port operations in the Louisiana Gulf.

The oil gusher came from a deepwater oil well 1,500 metres below the ocean surface. Estimates have ranged from 5,000 to 100,000 barrels (790,000 litres to 16 million litres) of oil being discharged per day. The resulting oil slick covered a surface area of at least 6,500 square kilometres, but varied day to day depending on weather conditions. The oil spill was expected to exceed the 1989 Exxon Valdez oil spill as the worst United States oil disaster in history.

Crews worked to contain the spill using anchored barriers, floating booms and sand-filled barricades. The United States Coast Guard attempted small, controlled burns of oil on the surface of the water. Meanwhile, BP Global, the principal developer of the oil well, made several attempts to stop the flow of oil, including using ROVs to close blow-out preventer valves on the wellhead; placing a container dome over the leak and piping the oil to a storage vessel on the surface; and inserting a tube into the largest of the two leaks and diverting the oil to a tanker at the surface.

Louisiana Gulf ports, which handle the bulk of United States agricultural commodities, have been watching the oil spill closely as weather conditions have pushed the oil towards shipping lanes. No incoming or outgoing shipments have been affected by the disaster yet. Routes have not had to be adjusted and no ships required extra cleaning to remove oil build-up before entering the ports.

Louisiana Gulf ports handle the majority of all United States agricultural commodities, including approximately two-thirds of all grain exports. Five deepwater ports are located at the Gulf, making it the busiest port complex in the world.

Prices

Commodity markets throughout the month of May felt pressure from outside markets as the European Union Debt Situation kept traders worried. Concern about rising government deficits and debt levels worldwide combined with a wave of downgrading of European government debt created alarm in financial markets. The debt situation has been mostly concentrated on recent events in Greece, where there was concern about the rising cost of financing government debt and possible defaults on payments.

During the last decade, a strong economy and falling bond yields allowed the Greek government to run large structural deficits. On April 27, the Greek debt rating was decreased to ‘junk’ status by Standard & Poor’s because of fears of default by the government. Stock markets all over the world declined following the announcement.

Greece turned to the European Union and the International Monetary Fund (IMF) for assistance. On May 2, an $110 billion loan was extended, conditional on the implementation of harsh Greek austerity measures. On May 9, Europe’s finance ministers approved a rescue package worth almost a trillion dollars aimed at ensuring financial stability across Europe. One of the main concerns prior to the bailout was that the situation could spread beyond Greece. Ireland, Spain and Portugal were considered most at risk because of high debt and deficit issues. The situation reduced confidence in other European economies. As a result, traders moved out of the Euro into other currencies such as the US dollar. Oil and metal markets were also pressured lower as positions were liquidated to reduce risk.

Chicago Board of Trade (CBOT) corn futures were supported throughout the month by Chinese demand for US corn. Strong feed demand in the country encouraged Chinese officials to import genetically modified (GM) corn to test regulations. Further shipments were booked after initial shipments were accepted without any problems. Support was also found from weather risk premiums for the long growing season being built into the market and a lack of farmer selling. Downward pressure was felt from a strong US dollar, lower crude oil and equities markets, a great start to the planting season with record acreages projected and generally good weather forecasts over the short term.

US wheat futures garnered spill over support from CBOT corn and soybeans, frost threats in the hard red winter wheat areas of the central and southern Plains and fundamental short coverings of positions. Ample US and world supplies, slow US export demand and generally favourable conditions for developing spring wheat crops limited advances in the futures’ prices. A strong US dollar kept US wheat less competitive on the world market, limiting export demand.

US soybean futures’ prices were pressured lowered by a strong US dollar and lower crude oil futures, weakness from outside financial markets, good planting progress in the United States and large world supplies. Limiting the losses were support from the corn market, uncertainty over a long growing season, firm cash prices, slow farmer selling and good end user demand in the nearby months.

Improved growing conditions and record areas for both Canadian canola and United States soybeans limited upside potential for Canadian canola futures’ prices. Losses in CBOT soy oil and soybean futures also weighed on canola prices throughout the month. Volatility in the Canadian dollar impacted the canola futures market. Domestic crush demand and export demand moved with the dollar, increasing as it dropped relative to the US dollar and backing away from the market as the Canadian dollar strengthened. Limited farmer selling provided support to the market, as farmers concentrated on seeding instead of marketing their grain.