Tuesday, June 15, 2010

Canola, hard wheat on the way up

The big news in the past week has been wet weather in Canada that is threatening to prevent some 15-25% of its cropping area from being planted this season.

Canada had a very dry winter and early spring, however, in the past month, many Canadian cropping areas have received 200-300% of their normal rainfall. The excessive moisture has resulted in the slowest planting pace in recent history and an expectation for the largest abandoned acreage in Western Canada since Government programs in the early 1970's intentionally idled acreage.

In an industry briefing last week, the Canadian Wheat Board (CWB) said that exceptional spring rainfall will severely impact 2010 crop production and projects anywhere from 8 to 12 million Prairie acres will be left unplanted this year.

Of this total, 3 million acres will likely be wheat, 1.6 million barley and 5.4 million of other crops (mostly canola, but also oats and peas). On top of this, there will also be lost production from crops suffering under excess moisture conditions. The CWB is estimating wheat and barley production

Canada dominates global canola exports and, therefore, canola prices have responded sharply, moving to a wider price premium over soybeans (back to 20%). The price premium has been tight (neutral up to 6-8%) to encourage increased exports after China imposed export restrictions on canola late last year.

Canola prices have a little more room to run, however, they will be capped by strong soybean production potential out of the US. Last week, the USDA said 85% of the US soybean crop was in good/excellent condition – you don’t get much better than this. Apart from a small amount of labeled product demand, vegetable oils are highly substitutable and demand for canola will ease sharply if prices move out of whack with the rest of the global oilseed complex.

Hard wheat should also benefit from the problems in Canada. Canada is a significant producer of higher protein wheat and is the latest in a list of global hard wheat producers to suffer production and quality issues. Early harvest results suggest the US Hard Red Winter (HRW) crop is low in protein, whilst cool, soft growing season conditions do not augur well for the US spring wheat crop (which is normally high protein).

In Australia, some of our best producing hard wheat country – in southern QLD - has not yet been planted. These events should soon start to widen the premium good quality, high protein wheat holds over other wheat.

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