Situation Report — October 2010

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Canadian harvest progresses with unseasonable weather

Western Canadian producers made significant strides in completing the 2010 harvest in October as unseasonable warm and dry weather spread across the Prairies during the first half of October. A low pressure system originating in California settled over the western provinces, bringing much needed above normal temperatures.

The favourable weather allowed harvest to progress quickly in Alberta. By October 21, approximately 86% of harvest operations had been completed province-wide. Combining was nearing completion in the North East and North West regions and was complete in the Peace River region. Progress continued to lag in the South and Central regions where crop development had been delayed by heavy summer rains. The quality of the crop will be an important issue this year, especially for the South and Central regions after frost caused significant damage to the late crops.

By the middle of the month, Saskatchewan producers had nearly completed the 2010 harvest. Approximately 97% of the crop had been combined after warm, sunny weather allowed producers to get into most fields. An additional 2% of the crop was swathed or ready to be straight-combined. In comparison, only 77% of the crop had been harvested and 20% swathed at the same time last year. Winter wheat, fall rye and dry peas have been completed. Flaxseed, canary seed and chickpeas have seen the lowest progress, with 85%, 87% and 73% of harvest completed, respectively. Sunflower harvest was just getting underway.

In the final crop report of the year for the week ended October 12, Manitoba Agriculture, Food and Rural Initiatives reported that good harvest progress was seen across the province. In the Southwest region, the cereal crop harvest was 80% to 85% complete while canola harvest was 80% finished. Almost 70% of the flaxseed had been harvested. The harvest of cereals and canola was almost complete in the Northwest region of Manitoba. Very little flaxseed had been swathed yet. An extended warm, dry spell allowed most producers in the Central region to catch up on harvest and start fall field work. Late maturing crops were all that remained to be harvested. Edible beans were 95% done, the soybean harvest was 75% to 95% complete, buckwheat was almost 50% complete, grain corn harvest was 10% to 20% finished, and the sunflower harvest ranged from 20% to 90% complete. In the Eastern region, the cereal grain harvest was nearly 100% finished and the oilseed harvest was 95% done. Most grain producers in the Interlake region had completed 80% to 100% of their harvest operations. A small portion of sunflower and soybean acres remained to be combined as wet field conditions hampered progress.

World supply and demand

The United States Department of Agriculture (USDA) released updated world supply and demand projections for the 2010/2011 crop year on October 8, 2010.

Global wheat supplies for the crop year were lowered by 1.0 million metric tonnes as a result of reduced world production. World production was estimated at 641.4 million metric tonnes, down 1.6 million metric tonnes from September. Offsetting some of the loss was an increase in beginning stocks of 0.6 million metric tonnes because of higher 2009/2010 production estimates for South America and Canada. World wheat trade was nearly unchanged for October. Imports were raised for North Africa and Mexico but lowered for European Union-27 (EU-27) and Iran while exports were increased for Uruguay and decreased for Mexico. Global ending stocks were projected to be 3.1 million metric tonnes lower with the largest reductions for EU-27 and the United States.

Coarse grain supplies for 2010/2011 were nearly unchanged. World corn production was reduced by 6.4 million metric tonnes as lower US and Russian production outweighed increases for Argentina, Serbia, EU-27 and several Sub-Saharan Africa countries. Global barley production was lowered because of smaller estimates for EU-27, Russia and Canada. Higher expected corn exports for Argentina, Paraguay, Mexico and Zambia resulted in an increase in global coarse grain exports for 2010/2011. Higher projected corn feeding in Turkey, Colombia, Indonesia and South Korea supported higher corn imports for the crop year.

World production of oilseeds remained unchanged in October at 440.6 million metric tonnes. Soybean production was increased by 0.4 million metric tonnes to 255.3 million metric tonnes while sunflower seed production was reduced as lower production for Russia was only partly offset by an increase for Ukraine. Global oilseed stocks for 2010/2011 decreased 1.7 million metric tonnes, to 71.4 million metric tonnes.

US company to build canola crush plant

Pico Holdings, a large publicly-traded company based in La Jolla, California, announced that it would invest $60 million into North Star Agri Industries L.L.C., based in Fargo, North Dakota. North Star Agri Industries is a planned $168 million canola processing plant and refinery to be built near Hallock, Minnesota. The plant would initially have a capacity of 365,000 tonnes annually but will be designed for easy expansion to 570,000 tonnes. A refinery would also be included to produce food-grade refined, bleached and deodorized oil. Expectations were for over 280 million pounds of canola oil and 195,000 tonnes of canola meal to be produced. Plant start-up was targeted for late 2012.

Marketing arrangements for the canola oil and meal were already made with Land O' Lakes, the big northern-states co-op.

The plant will require either a large increase in canola production in the region or regular Canadian canola imports. The entire 2010 US canola crop, including areas outside a trucking radius of the proposed plant, was estimated at 1.06 million metric tonnes. For the previous crop year, it was just 670,000 metric tonnes.

Bunge plans expansion of processing plant

Bunge North America, the North American operating arm of Bunge Limited, announced plans to double capacity of its canola processing plant in Altona, Manitoba as part of a multi-year expansion program of its four Western Canada processing plants. According to president and CEO of Bunge North America, Soren Schroder, the project will improve efficiencies along a fully integrated chain from farmers, to food and feed manufacturers.

Capacity at the Altona plant will increase from 1,100 metric tonnes to 2,500 metric tonnes per day and a new deodorizer would be installed to fully process the oil. The expansion is expected to be complete in time for the 2010 grain harvest, provided all necessary approvals are received.

In addition to Altona, Bunge has canola processing plants in Nipawin, Saskatchewan; Hamilton, Ontario; Fort Saskatchewan, Alberta; and Harrowby, Manitoba.

2010 raises questions of normal weather

According to Environment Canada, 2010 broke rain records in Western Canada after a year of drought. April to September were much wetter than normal over a large area of the Prairies, stretching from Wetaskiwin, Alberta to Whitemouth, Manitoba.

Longstanding records were broken at many weather stations in Saskatchewan. The frequency of the rain was also unprecedented. David Phillips, one of Canada's best known weather forecasters, reported that at many locations on the Prairies, it rained 60% of all days between the end of April and the end of September.

Cooler than normal temperatures added to the problem, keeping fields wet once they got wet. In some places, growing degree days were 20% or more lower than normal.

In Manitoba, flood forecasts continued to be issued throughout the summer, including rare August flood warnings for the Assiniboine River Valley. The Red River near Winnipeg, Manitoba was running at 5,000 cubic feet per second in late September, well above the normal level of less than 1,000 cubic feet per second.

A significant factor in 2010 weather was a series of slow moving weather systems and the location of the jet stream. Typically, rain is sporadic on the Prairies, falling for a few hours before the skies clear. However, this summer, clouds remained for days at a time.

Prices

On October 19, China announced that it was going to raise interest rates by 25 basis points, the first change since December, 2007, to slow their economy. The move was viewed as an attempt to fend off inflation through a tighter monetary policy. Many commodities in China are at or near all-time high levels and real estate values have been soaring. As a result, there are concerns about rising inflationary pressures on the country.

The market reaction immediately following the announcement was intense. Most traders had been caught off guard. Commodity and stock markets came under heavy pressure as traders used the news to take profits out of long-held market positions. The longer-term concern in the market is that this change in banking policy could curb Chinese demand for foreign goods.

US corn futures started the month down as the USDA's quarterly stock report eased concerns about supplies and reduced the need for demand-rationing. At the lower prices, interest from end-users increased as ethanol margins improved. Weakness in the US dollar and ongoing concerns about lower yield and production potential also supported prices. Futures' prices set two-year highs mid-month as concerns about tightening supplies encouraged, after the USDA reduced 2010/2011 corn production estimates, end-users to buy. Major users of corn, including ethanol plants and livestock producers, rushed to the market to cover their needs. The United States Environmental Protection Agency's (EPA's) approval of an increase in ethanol levels in gasoline for model year 2007 cars and newer also encouraged limited buying. Lower than expected export sales, farmer selling and good harvest progress slowed some of the advancements in futures' prices as the month progressed.

Wheat futures markets followed corn futures throughout the month as the market lacked fresh speculative news on its own. The dryness issues which affected Russian production this summer had already been built into market prices. Recent rains had also eased worries about the Russian winter crop development and the US winter wheat plantings. While global wheat stocks for 2010/2011 were projected to be tighter than the previous year, supplies were believed to be adequate to meet global demand.

Harvest pressure and reports of strong yields weighed on Chicago Board of Trade (CBOT) soybean futures, in spite of end-user buying and a brisk export program. Soybean futures' prices moved in tandem with corn throughout much of the month as the two crops need to compete for acres for next year and the same pressures were felt from outside markets. Some risk premium was added into the market over concerns surrounding the South American soybean production and the possible impact of dryness in key Brazilian crop areas.

Favourable weather conditions in Western Canada allowed producers to make good harvest progress in October. Downward pressure was exerted on canola futures' prices as harvest neared completion. Producer selling from the combine right into the cash pipeline also kept a ceiling on prices. Steady domestic demand underpinned the market, offsetting some of the weakness in the cash market. Early in the month, a strong Canadian dollar weighed on futures' prices. Gains in the CBOT soybean futures spilled over to lift canola futures' prices higher mid-month. Two monetary policy announcements later in the month combined to push the market higher as Canadian canola appeared more competitive on the world market. After the Bank of Canada left interest rates unchanged and cut its near-term growth forecast, the value of the Canadian dollar weakened. Coinciding was a surge in the value of the US dollar versus almost all other currencies in response to the change in Chinese banking policy. Routine pricing of old export business and rumours of fresh export demand for Canadian canola also helped to support advances late in the month.

On October 8, the Canadian Wheat Board (CWB) announced interim payments for the 2009/2010 for most grades of wheat and designated barley. The interim payments for wheat were $16 per tonne while the payments for designated barley were $10 per tonne. No interim payment was announced for durum wheat.

Field pea prices strengthened during October as farmers remained out of the cash market and the export pace remained strong. A record start to Canada's 2010/2011 field pea export program continued to support prices as Indian tenders were filled. Providing some uncertainty to the market were forecasts of a record pulse harvest in India in 2010/2011. India boosted minimum support prices (MSP) for pulses grown in the winter, or rabi, season by approximately 20%. Combined with the late departure of this year's monsoon, many traders believed that Indian farmers would plant more desi-type chickpeas, red lentils and other rabi season pulses. Indications pointed to a record 16.5 million metric tonne pulse crop for India in 2010/2011. There is also an expectation that the Indian government would not continue to subsidize the resale of imported pulses to private traders by state trading companies when it expires at the end of the current fiscal year. Expectations were for lower import demand from India for the first half of 2011. Improving Indian crop prospects and potential increases in desi chickpea production in Australia could have a negative effect on field pea prices in the new year.

Lentil prices were supported over concerns for the quality of the Canadian crop as harvest operations continued. The uneven quality of the crop was reflected in variations in colour and other grading factors within grades. Markets for high grade lentils remained strong while discounts for lower grade lentils were at record high levels in Western Canada, especially for large green lentils. The spread for red lentils has not been as wide because producers have been able to harvest mainly No. 2 or better red lentil crops. There have been limited quantities of No. 1 and No. 2 grade green lentils harvested this year.