Situation Report — December 2010

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Canadian wheat and canola production declines

Statistics Canada surveyed 27,600 farmers from October 25 to November 12 regarding their crop production estimates for 2010. Production of wheat and canola on the Prairies declined while a record soybean crop was reported for Ontario, Quebec and Manitoba.

Wet weather delayed both spring planting and fall harvest on the Prairies, resulting in lower production and quality for many of the major grains and oilseeds. Early frosts also caused yield and quality damage in many areas.

Total wheat production decreased 14.6% from 2009 to 21.0 million metric tonnes. The largest decrease was in Saskatchewan where late spring flooding reduced the number of acres able to be planted. Manitoba wheat production declined by 21.3% as a result of lower yields and harvested acres. Meanwhile, after two years of drought, rainfall throughout July benefited Alberta producers, who saw an increase in wheat production of 9.8% from strong yields.

Canola production was also affected by the excessive moisture in Saskatchewan and Manitoba. Both provinces saw declines in production of 16.2% and 21.7% respectively. Summer rainfalls replenished Alberta soils, allowing producers to harvest a record canola crop of 4.5 million metric tonnes. In total, Canada produced 11.9 million metric tonnes, a decrease of 4.4% from 2009. Production was still above the five-year average of 10.6 million tonnes, reflecting the increased importance of canola in Canadian agriculture.

In spite of a 7.0% decrease in yield from the prior year, lentil production in Western Canada set of new record of 1.9 million metric tonnes produced from a record 3.3 million acres harvested. Many producers concentrated on planting higher-valued lentils as the spring planting season was shortened by excessive moisture. Meanwhile, dry pea production declined by 15.2% in Western Canada as a result in a drop in harvested area of 480,000 acres. Farmers produced 2.9 million metric tonnes of dry peas from approximately 3.3 million acres.

For a second consecutive year, Canada set production and harvested area records for soybeans. A total of 4.3 million metric tonnes were harvested from 3.6 million acres. Production was 24.0% higher than in 2009 while harvested acres were greater by 6.8%. Strong prices and a late planting season encouraged Manitoba producers to increase soybean acres to record levels. As a result, production increased by 35.6% from 2009 to 435,400 metric tonnes. Soybeans also handled the excessive moisture throughout the growing season better than most crops, evident in a 6.4% increase in yield to 31.4 bushels per acre. Ontario producers harvested slightly more acres than in 2009; however, a 14.4% increase in yield resulted in 3.0 million metric tonnes of soybeans being produced. This was a rise of 16.4% compared to 2009 production of 2.6 million metric tonnes. Quebec producers saw the largest increase in soybean production as approximately 807,000 metric tonnes were harvested from 644,900 acres. Production was 52.2% higher than 2009 as yield increased to 46.0 bushels per acre.

Record yields in Eastern Canada led to a 22.6% increase in corn production in Canada for 2010. Quebec producers reported an average yield of 148.0 bushels per acre. Total production was 3.4 million metric tonnes. Ideal growing conditions helped Ontario producers harvest 7.7 million metric tonnes of corn. A new record for yield was set at 164.0 bushels per acre, well above the five-year average of 145.6 bushels per acre. In Manitoba, corn production increased by 32.2% from 2009 despite a decrease in seeded acres. Improved weather conditions during the fall allowed producers to harvest 180,000 acres, 33.4% more than the previous year. Approximately 480,100 tonnes of corn was produced.

Canadian biofuel industry shapes vision for the future

The Canadian Renewable Fuels Association released a report card on the Canadian renewable fuels industry, Growing Beyond Oil Delivering Our Energy Future, detailing the accomplishments of the Canadian renewable fuels industry to date, identifying key opportunities and challenges for the future, and shaping a vision for the future.

According to the report, in the last five years, $2.3 billion has been invested in the construction of new production facilities across Canada. Domestic production capacity of two billion litres per year has been created. The renewable fuels industry has quickly become an important driver of economic growth, particularly for rural Canada. New plants have attracted jobs and economic prosperity. Demand for feedstock has generated new customers and has increased incomes for farm families.

An independent survey was conducted in late 2009 and early 2010 by Doyletech Corporation to measure the economic impact of Canada's biofuel sector. A total of 28 Canadian-based biofuels facilities that were either in production or in development were contacted. The results of the survey found that the biofuels industry generated economic impacts in four areas: jobs, direct investment, construction benefits and economic activity. Over 1,000 permanent manufacturing jobs have been created to support plant operations while over 14,000 direct and indirect jobs were created during the construction of new production facilities. Capital investment totalled $2.3 billion. Approximately $3 billion in economic activity was generated during the construction of the facilities. The sector expanded the tax base at local, provincial and federal levels by $1.5 billion during the construction phase. The net economic benefit to Canada's economy from the renewable fuels sector is estimated to be $2.0 billion per year.

The agriculture industry has benefited from the growth in renewable fuels: increased local farm gate prices and associated revenue for farmers; decreased reliance on agricultural support and safety net payments from governments; price stability for grains and oilseeds; forward pricing opportunities to hedge against falling grain prices or rising crop input and fuel costs; and creation of a valuable high protein feed market from the by-products of biofuel production. As advancements are made in crop genetics and yields, the biofuel industry will be a critical and growing component of the overall supply and demand balance for grains and oilseeds. Ethanol and biodiesel will provide important domestic value-added markets for producers. The production of advanced biofuels will provide value to waste agricultural biomass, such as corn cobs and stover and straw, creating new markets for Canadian producers.

The federal government created a Renewable Fuels Strategy to support the development of renewable fuels in Canada. The objective of the strategy is to reduce greenhouse gas emissions by mandating an average 5% renewable fuel content based on the gasoline volume and a 2% renewable fuel content in the distillate pool (diesel). The ethanol mandate came into effect on December 15 while the biodiesel mandate was expected to be adopted by 2012. A number of provincial renewable fuel mandates are also in place. Four provinces that collectively account for approximately 60% of all retail sales of gasoline in Canada have ethanol mandates: 7.5% mandate in Saskatchewan; 8.5% mandate in Manitoba; and 5% mandates in British Columbia and Ontario. British Columbia and Manitoba have also implemented biodiesel mandates, at 3% and 5% respectively. Many provinces have also implemented a number of programs and policies to encourage development and production of the renewable fuels sector.

New pricing program for feed wheat

The Canadian Wheat Board (CWB) launched a new pricing program to give farmers the choice of immediately locking in prices for Canada Western feed wheat using the CWB's Early Payment Option (EPO).

The EPO program was designed to provide producers with increased cash flow following delivery while establishing a floor price with upside potential for future CWB payments. Producers are allowed to lock in different percentages of the current reference grade Pool Return Outlook (PRO) value. The percentage of the PRO locked in at sign up is called the Early Payment Value (EPV) and is locked in at the time of EPO sign up.

Producers receive the initial payment for the grade delivered to the elevator, less freight and elevation. An additional payment is issued within ten business days. If the final pool return is lower than a producer's EPV, he is still guaranteed the EPO contract price. However, if the final pool return is higher than the total payment received under the EPO, he would be eligible for future CWB payments.

Separate EPO programs are offered for the seven classes of milling wheat, feed wheat, milling durum, No. 4 Canada Western Amber Durum (CWAD), No. 5 CWAD and selected barley. For feed wheat, the EPO contract allows producers to lock in an EPV equal to 80%, 90%, 100%, 125%, 150%, 175% or 200% of the PRO.

The large amount of feed-grade wheat produced this year, combined with a strong global market for feed wheat, has meant that the CWB is able to offer higher levels of cash flow and price guarantees through new higher-level EPOs.

Weather continues to dominate markets

After a difficult 2010 summer, forecasts for the winter and spring seasons have become more important to the market. Predictions have centred on La Niña weather patterns and possible implications in the major agricultural regions of the world. La Niña was expected to strengthen and persist through the winter and possibly well into next summer for many regions.

Dryness has become more of a worry for soybean producers in parts of southern Brazil and northern Argentina as extremely low rainfall from September to November has depleted ground moisture. Corn and soybean crops will be vulnerable to drought during the summer growing season (December to February).

The prime US hard red winter wheat states are predicted to be warmer and drier than average. This could compound the moderate drought conditions that have lingered since September. The central United States, including the Corn Belt, should see normal or below temperatures and precipitation. For the US northern plains and Canadian Prairies, temperatures will be colder than average and snowfall will be greater than normal. Many areas of the Prairies ended the fall season under wet conditions. Higher snowfall amounts could lead to flooding and a delayed start to the spring growing season.

For the Canadian Prairies, 2010 will be remembered as one of the wettest years in history. At the beginning of December, the Winnipeg, Manitoba region was approximately 11 millimetres (mm) shy of setting a new precipitation record. The record of 732.6 mm was set in 1962. Regina, Saskatchewan had received approximately 450 mm for the year while Saskatoon, Saskatchewan had already surpassed the 1927 record of 550.5 mm. The region had already received almost 600 mm with one month left in the year. Alberta cities of Calgary and Edmonton missed their respective top ten rainfall records; however, Red Deer, Alberta was only 13 mm away from the 1999 record of 632.2 mm.

Mustard industry receives grant

The Canadian Special Crops Association received a $30,000 grant from the Government of Canada through the AgriMarketing Program. The grant will be used to promote mustard seed in foreign markets and to increase the knowledge and appreciation of mustard seed through promotional activities.

Prices

On December 2, the CWB increased initial payments for wheat, durum wheat and barley. The increase ranged from $42.45 to $91.30 per tonne for wheat, depending on grade and class, $44.40 to $70 per tonne for durum wheat, $60 per tonne for Pool A feed barley and $50 to $52 per tonne for designated barley. Initial payments represent a portion of the returns farmers can expect from the sale of their grain over the entire year.

The CWB released an updated Pool Return Outlook (PRO) for December for the 2010/2011 crop year on December 16. Wheat values increased between $3 and $26 per tonne from last month's PRO, depending on class, grade and protein level. Durum wheat was up between $4 and $14 per tonne and malting barley was down by $1 per tonne. Pool A feed barley remained unchanged while Pool B feed barley was higher by $3 per tonne.

Continued strength in the futures values on all three North American wheat exchanges supported the increase in wheat PRO's. Heavy rainfall in Australia as farmers have been harvesting has pushed prices higher since November. The delayed harvest has resulted in a significant downgrading in the quality of the Australian crop, leaving the global market short of high quality milling wheat. Importers have been forced to turn to the United States for supply of good quality milling wheat to meet their needs, as evident by the strong US export pace. Futures' prices have been pushed higher as a result.

Excessive moisture in Eastern Australia has also impacted the feed barley markets. Traders have been anticipating an abundant supply of feed barley and have lowered cash prices as a result. Much of the barley will be used domestically to meet Eastern Australia's feed demand from its livestock sector. Farmers were also expected to hold off until later in the year to move their production because of the drop off in prices. A strong Australian dollar added to the limited selling interest. Meanwhile, on the demand side, Saudi Arabia still required a significant amount of feed barley to meet its needs and was expected to require imports from Europe and Canada as the marketing year progressed.

Record pace of exports throughout the fall shipping season has helped to support dry pea prices in Western Canada. Current inventory in Canada would not be able to sustain this high pace, reducing the pressure felt on price from pulse production estimates coming out of India. Advance estimates of the Indian kharif harvest were six million tonnes of pulses while the rabi crop was off to a fantastic start. If the Indian crop conditions remain good, total production could reach over 18 million metric tonnes. The forecasted production would provide an additional 3 to 4 million metric tonnes of pulses to the domestic market. Typically, India imports 3 million metric tonnes annually. Prices could start to soften in January as the rabi crop reaches maturity and farmers prepare to harvest.

Also supporting dry pea prices were production problems in Australia as heavy rains slowed harvest progress and affected quality. There should be less competitive pressure on price from the southern country in the new year. Ongoing USDA PL-480 purchases of split yellow peas kept processing capacity well utilized in the United States. Individual processors were limited in the extent of the commercial activity that they could participate in.

Quality issues have been a dominant factor on lentil prices during the fall marketing period. While there is an abundance of low quality lentils, good quality lentils are becoming in short supply, increasing the price spread between No 2 and No 3 lentils. Fears over the impact of excess moisture in Australia on red lentils had many exporters waiting to see how the harvest finished. The Indian Subcontinent will consume the low grade lentils; however, it is price sensitive. Prices for low grade lentils were expected to soften as the marketing year progressed while good quality lentils, especially green lentils, could move higher later in the year.

Canary seed prices have been hampered by tough economic times in Europe and ongoing restrictions on shipments that contain wild buckwheat into Mexico. Demand has been as global economic uncertainties kept traders nervous. Adding some support to prices, though, were lower yields and quality issues in the Western Canadian crop this past year.