Situation Report — November 2010

View the most recent version.

World supply and demand

The United States Department of Agriculture (USDA) released updated global supply and demand estimates on November 9, 2010.

Global wheat supplies for 2010/2011 were increased slightly as higher world production offset lower carry-in. World production was raised 1.5 million metric tonnes as a result of higher estimates for Argentina, Australia, EU-27 and Paraguay. Global wheat trade for 2010/2011 was also increased. Imports were up for China, Egypt, South Korea, Azerbaijan and the United States. Exports rose for Argentina, EU-27 and Russia. Wheat consumption was estimated to be 2.5 million metric tonnes higher, reflecting a 2.0 million metric tonne increase in Chinese wheat feeding. Global ending stocks for 2010/2011 were dropped by 2.2 million metric tonnes.

For the 2010/2011 marketing year, global coarse grain supplies were lowered by 3.3 million metric tonnes. Reductions were made to corn production in the United States, barley production in China and oats and rye production in Russia. Global trade estimates decreased slightly with lower corn imports for the Philippines and South Korea partly offset by small increases in corn imports for Saudi Arabia and sorghum imports by EU-27. Despite higher corn feeding in China and Argentina, global coarse grain consumption was lowered to reflect reduced corn feeding in EU-27, South Korea and the Philippines.

Estimates for global oilseed production in 2010/2011 were increased by 0.1 million metric tonnes from last month, to 440.7 million metric tonnes. While soybean production was increased, production projections for sunflower seed, rapeseed, peanut and cottonseed were decreased. Oilseed trade was estimated to be 111.4 million metric tonnes, an increase of 1.8 million metric tonnes. Chinese soybean imports were raised to 57 million metric tonnes to reflect strong demand. Soybean and soybean meal imports for EU-27 were also higher as a result of lower sunflower seed and rapeseed availability.

Nikator closes out Port of Churchill season

The shipping season at the Port of Churchill ended on November 2 as the vessel Nikator left the port loaded with 26,000 metric tonnes of durum wheat destined for Nigeria.

Churchill enjoyed a busy season with 656,298 metric tonnes, including both Canadian Wheat Board (CWB) and non-board grains, flowing through the port. This was the second highest tonnage on record. Approximately 600,000 metric tonnes of CWB grains were handled, resulting in cost savings for Prairie farmers. The port also handled non-board grains for the first time in three years, including 43,000 metric tonnes of canola and 12,000 metric tonnes of dry peas. It was the first ever shipment of food-grade peas for Churchill.

The shipping season opened on July 29. A total of 22 vessels called at the port during the three month season and 7,225 rail cars were unloaded. The port also handled goods destined to communities and mines in Nunavut.

European Union GMO tolerance update

Reports indicated that the European Union (EU) was close to moving forward with a plan to allow small traces of non-authorized biotech material in imports of grain and oilseeds for animal feed. The proposed new tolerance was seen as a technical solution to replace Europe's zero-tolerance policy on the presence of any genetically modified organisms (GMO) that have not been approved by EU regulators.

The European Commission's food safety unit authored the proposal. It was still in draft form and could not be published until all internal commission departments have given their approval. It was believed that opposition by the European Commission's trade department would soon be resolved. The proposal would then be considered by EU country experts at a meeting in mid-November and could be put before EU ministers to consider in early 2011.

Alliance Grain Traders expands

Alliance Grain Traders Inc. announced the acquisition of A. Poortman Ltd. Group of London, England for CAN$13.5 million. The company is an international importer and distributor of leguminous pulses and birdseeds. The purchase also included a processing plan for dry and edible beans and pulses in Tianjin, China and offices in London, the Netherlands and China.

Alliance Grain Traders also planned to commit a further CAN$2 million for expansion of the Chinese bean facility.

Prices

For a second consecutive month, outside forces impacted commodity markets, creating volatility.

On November 3, the United States Federal Reserve unveiled its plan to buy US Treasuries in an attempt to help the struggling US economy. The central bank will purchase US$600 billion of government debt over the next eight months. Securities will be bought at a rate of about US$75 billion per month and may be adjusted if the recovery continues to fall short of expectations. This second round of quantitative easing was seen as providing inflationary pressure to the US economy and promoting a stronger pace of economic recovery.

In response to the Federal Reserve's announcement to effectively print more money, investors and traders bought commodities and stocks as the US dollar weakened. Corn, wheat and soybean futures' prices all rallied on speculative buying. US soybean futures approached 17-month highs because of the sharp decline in the US dollar.

One week later, massive rounds of speculative liquidation resulted in many commodity futures markets reaching their exchange imposed daily trading limits. Rumours that China was considering a quarter of a percentage point (0.25%) interest rate hike to slow rising food inflation, and indirectly slow Chinese commodity import buying interest, started the sell-off. While China had not yet moved forward with any rate changes and the country's buying momentum for a wide range of raw materials continued at a strong pace, just a hint of even a minor slowdown in imports sparked an emotional round of speculative selling of heavily built-up long positions.

Official data from the Chinese government showed that consumer prices rose by 4.4% last month. Average inflation for 2010 has reached 3.0%, with an increase likely unless readings slow sharply during the remainder of the year. The higher inflation news created fear among traders that China's central bank could raise interest rates further. A rate hike would reduce the amount of money available to invest in commodities, curbing import demand.

Adding to the macro-economic worries were renewed concerns that the European debt crisis was once again becoming unmanageable. This time, Ireland was at the centre of the issue as concerns that Dublin would not be able to control its massive debts and would require a financial bail-out from its partners in the Eurozone and possibly the International Monetary Fund, similar to Greece in the summer, arose. Many economists also believed that other EU countries continued to struggle with their own economic problems.

The third event that triggered the downturn in markets on November 12 was the end of the G20 summit in Seoul, South Korea. The summit fell short of resolving a bitter dispute that has the potential to lead to a currency war. The leaders could only agree to pledge to refrain from competitive devaluation of their currencies. Observers worried that the dispute over who may be manipulating their currencies to gain a trade advantage has the potential to turn into an escalating round of protectionism.

Following limit-down losses on November 12, markets rebounded on November 15 to settle sharply higher. The absence of any rate hike by China over the weekend and a general belief that China would remain an active importer eased pressure on the markets, allowing for a recovery in prices. Rumours of a meeting between Argentine and Chinese agriculture ministers, including talks of exports to China, also added support to the commodity markets.

The next day, futures' prices tumbled in a broad-based commodity sell-off as worries about Chinese demand once again pressured the markets. Fears that China would raise interest rates and implement tighter controls on consumer prices and agricultural commodities to control inflation returned to plague futures markets. Numerous reports out of China compounded to return uncertainty to the market.

An article in the China Securities Journal reported that the government may announce a set of controls including measures to limit consumer price increases and punitive policies targeted at speculation on agricultural products.

China's premier, Wen Jiabao, said that food costs were at the centre of China's inflation worries. The possibility of price controls will build as global agriculture commodities continue to rally. China's central bank chief stated that the country is under pressure from excessive capital inflows into the country while the Ministry of Commerce confirmed that it would work with other government agencies to curb inflation.

Traders believed that an increase in interest rates would curb Chinese demand for a variety of commodities while price controls could reduce the amount that Chinese companies were willing to purchase grains and oilseeds at. While there are other factors influencing commodity markets, China was largely guiding price action.

A variety of factors that sparked the beginning of the summer rally remained in the markets, adding underlying support and limiting prolonged downturn in prices. Smaller than expected corn acreage in the United States, declining US corn yield prospects, a rapid rate of corn use for ethanol production, the strong pace of US soybean exports, growing world vegetable oil demand, a large decline in wheat production in Russia and Kazakhstan, crops problems in Western Canada and a poor start to the US winter wheat crop continued to influence prices. La Nina weather conditions have created some concerns about southern hemisphere crops and potential impact on the 2011 crop in North America.

Winnipeg canola futures' prices moved in tandem with the Chicago Board of Trade soybean prices throughout much of November. Good domestic crusher demand, an easing of farmer selling into the cash market and pricing of old export business continued to underpin the market. Elevator company hedging in anticipation of increased farmer deliveries, lack of fresh export business and profit-taking at the highs restricted some of the upside potential in futures' prices.