grainsense_west_august06 by Jorge Gerardin

Market Report

GrainSense™

Volume 3

Issue 8 August 2006

West

Table of Contents

To do: q Review your 2006/07 cost of production spreadsheets

q Price lower quality wheat on outstanding DPCs, high quality on FPCs

q New crop December 2007 wheat pricing orders

q Examine the value of PriceProtectors on wheat/canola

q GPOs in canola over $300 futures q GPOs on oats over $1.95 futures q Harvest safely

General Overview

Page

Farm Policy

Page

Wheat

Page

Oilseeds

Page

Feed Grains

Page

Recap

Page

General Overview: Weather Markets Essentially Done August can be a month of extreme volatility, but more often than not it is simply a month between when the crop is made and when it is harvested and things just seem to settle back. This August has certainly followed that path. With the August USDA report establishing the corn yield to be 152 bushels/ acre, the market felt the “weather” markets were essentially done and there would need to be solid evidence that the consumptive market was willing to pay these current levels. Given that most buyers tend to hold back until the last half of harvest, it didn’t leave much for the market to play with from the bullish side and all of a sudden the massive speculative long got pretty lonely without a supply story to talk about. With no supply story, the spectacular didn’t have anything to play with and started heading for the exits. As a result, the corn and wheat markets have had a very tough go over the past month. In the last month, corn has lost 40 cents, Minneapolis and Kansas City wheat have lost about 50 cents and the bean market has lost 65 cents. Oats and Chicago wheat almost seem “strong” having lost less than 20 cents. ®

The USDA accounted for the high eastern yield off setting some of the poor western yields when it posted a yield of 152.2 bushels/acre. Not surprisingly, the most dramatic turn around from a year ago was Illinois where the USDA is calling its crop 172 bushels versus last year at 143. At the same time, Iowa was left unchanged versus a year ago at 173 bushels. Nebraska was only down a bushel to 153 but the real hits were in the Dakota’s where South Dakota dropped from 119 to 100 and North Dakota went from 129 to 102. Those crops are a disaster.

It is amazing the crops look as good as they do considering what the drought maps look like. Essentially, everything west of the Mississippi appears to have a problem save for southern Minnesota and central and eastern Iowa. But from North Dakota straight down through Texas it’s dry as a bone with some areas beyond extreme. No doubt, the dryness in hard wheat country will come into play for the coming winter wheat crops, either via lower seeded acres, poor germination, or just ratty looking stands heading into the winter. Everyone will say that you can’t kill a winter wheat crop in the fall, but you’re better off having some sort of moisture base to work with when the crop comes our of dormancy than not. While the drought map points out the dry areas, it certainly doesn’t do justice to how good the crops look in the eastern Corn Belt. Crops in Illinois, Indiana, Ohio, Michigan, and Ontario look fantastic. The Ontario wheat crop is a case in point. Chances are the province will have a record winter wheat crop thanks to big acres and record yields, and the corn and bean crops look great. However, there will be many poor results in the western Corn Belt.

USDA Yield Forecasts

The USDA’s low soybean yield estimate was a surprise though. At 39.6 bushels/acre it is about a bushel below trend line which seems odd considering the USDA’s corn yields – it is showing Illinois corn yields year over year improving by 29 bushels but the bean yield is dropping by 2. Admittedly, last year there were some very timely rains at the end of July, but it just doesn’t ring quite true to see such dramatic improvements in one crop and slight declines in another. As it was, the “bullish” bean number was quickly sold off on report day as the corn and wheat markets melted down. In addition, the weather over the past few weeks has been pretty solid and the bean crop seems to be doing quite well. It’s safe to assume that everyone in the market is expecting over 40 bushels – many are over 41 and there may even be a few over 42. The September reports may re-jig the yield estimates, probably taking the bean yield up and leaving the corn yield pretty much alone. The October reports will probably more accurately reflect the true yields of this year’s crops. The only surprise in the wheat market was the drop in spring wheat production. Most were expecting a number under 400 million bushels, when in fact it was down only 2 million at 423 million. Many are still having a tough time swallowing that number, claiming that the actual harvest results out of western North Dakota and Montana will be lower than where the USDA currently has them pegged. Time will tell, but for the moment it appears that a sub 400 million bushel crop is not in the cards.

New Demand Despite the back off in the markets there is no getting around the long-term demand pull the whole ag commodity market is going through. There is no doubt bioenergy is brand new demand that hasn’t traditionally been a factor. Ethanol in the U.S. and Canada can chew up big chunks of corn and the biodiesel sector will take on a significant amount of vegetable oils, whether it be canola, palm, or soybean oil. As we move forward, with corn and oilseeds taking on more ground, wheat will have to respond to keep its base acres given the overall wheat carryouts continue to decline. Even with the acreage shifts out there, you are still going to see yields pushing up over trend line. The point is that all markets are probably trading more towards the lower end of their trading ranges as harvest begins.

Western Canadian Harvest Western Canada is only now getting into harvest. The weather forecasts for the balance of August look pretty good and the hope is that a lot of the crop can be off by September 15. Typically, you can count on good quality on any grain harvested before Labour Day, and that should be the case. Given how hot and dry July was, the crops held up reasonably well and that’s probably thanks to all the moisture in the ground heading into the growing season. The exception to the good sub-soil moisture was the Red River Valley region, but even that area was able to do quite well, all things considered.

Statistic Canada Product Survey Numbers to Watch

a fairly good average, nothing special and certainly no where near what we had last year. Last year, there was very little in the way of yield sapping heat, plus we didn’t have such a hodge podge of seeding conditions like there were in eastern Saskatchewan this year. All of the numbers will be closely watched but none more closely than canola, barley, and oats. The canola crop should come in around 8.2 million tonnes basis a yield of about 28 bushels/acre. We won’t get last year’s yields this year. Still, a 28-bushel crop is a very solid crop. Chances are, most people are expecting a canola crop between 8 and 8.5 million tonnes, and anything outside of that range should have an impact on the market. The reason the barley number is important is because there is a very real possibility that this coming year’s carryout could be pulled under 2 million tonnes which is starting to get tight. Everything starts with production and this year we see production just over 10 million tonnes – Taking out the 2002 drought crop, it’s the smallest barley crop since 1979. The oat crop will also be an interesting number given the wide variability in the growing conditions. Oats in the Red River Valley got in early but had virtually no water. That being said, there were spotty showers that helped those that got them tremendously. In contrast to the Red River Valley is eastern Saskatchewan where the crop was put in late creating an uphill battle to achieve a decent yield with good quality. What we have been hearing is high thin counts due to the lack of rain and this may indirectly force demand higher. You can’t make much of an oat flake out of thins so demand for raw bushels may have to nudge higher. We’re looking for an oat crop of 3.65 million tonnes, but wouldn’t be surprised if it came in closer to 3.5 million. Though it won’t get as much press as the canola, barley, and oats numbers, the non-durum wheat production is also important. Thanks to the biggest acreage base since 1997, there should be an increase in production over last year to just under 22 million tonnes. If it is close to 22 million, it will be the biggest crop since 1996. Maybe more important is the fact that if the crop is harvested in good time there should be the highest amount of milling quality wheat produced in ten years. Not that you wish ill on others, but how many times have we hoped for problems else where but good crops here. Well, in wheat there are problems almost everywhere else and we should do just fine.

The results of Statistics Canada’s first production survey will be out on August 25 The survey itself was conducted at the end of July so there is still plenty of movement in terms of which way these crops can go, but in general, it’s probably safe to say that the weather in August hasn’t pushed the numbers around that much. Overall, we see the crop as being Copyright © 2006 Cargill Limited. All rights reserved.

The Funds

Farm Policy: Take Away:  No WTO agreement was reached so talks concluded in July.  The debate over how a dual wheat market would be structured in the west is the biggest issue right now. The WTO talks were finally laid to rest in July with no agreement. There were just too many intractable positions by too many people to allow the process to move forward. No doubt, an opportunity was missed but it’s safe to say that the ball will get picked up again at some point. In the mean time, the U.S. has mid-term elections to deal with in November and with Trade Promotion Authority running out next summer, it looks as though a WTO agreement isn’t going to happen anytime soon.

Over the past week the CRB index has lost some luster and that has probably helped take some of the steam out of the ag commodity price structure as well. It should be noted that the “hedge” fund positions are currently included under commercial positions in the CBOT’s weekly commitment of traders reports. Currently, the “speculator” positions are separated out and these are the positions that everyone reports on when talking about the spec positions. As an example, the spec position in corn had reached over 250,000 contracts at one point but that number doesn’t include the long only hedge fund. Over the past few weeks that corn position has been scaled back to 150,000 but there is still some question as to whether any of the hedge fund ownership has been liquidated or not. You could probably argue that the hedge position may not even think about getting liquidated unless the CRB gets down to the 315-type level. Bottom line is that the general commodity bullishness has waned over the past few weeks and that hasn’t helped the grain markets.

Canadian Dollar The dollar has been fairly quiet, coming back a little from the weakness that put it down into the 88-cent range. It sure feels as though the dollar doesn’t really want to move much from its current levels, maybe trading in an 88 to 91 cent range. While a 3 cent move can certainly impact Canadian prices, it doesn’t seem like we’ve got a dime either way in the market. Even the talk of par with the U.S. dollar has died down and it could very well be that for the coming crop year the dollar just won’t have that much of an impact on direction.

With no new WTO agreement in place it certainly puts an air of uncertainty around the timing of a new U.S. Farm Bill. There had been some talk of an extension if there hadn’t been a WTO agreement and that talk will probably get louder now. The general consensus on the U.S. mid-term elections is that while the Republicans will loose seats in both the House and the Senate, they won’t loose control of either body, which makes the writing of the Bill a little easier. The other side of the coin is that it could take a few years to get the WTO jump started so you may as well go ahead and write up a new Bill on the presumption that you can’t wait around waiting for the world to come to an agreement. In Canada, the biggest issue is the debate over a “dual” wheat market in the west. It’s probably fair to say that what’s being debated is how a dual market would be structured – a step forward since in the past the dual market had never been defined so it was difficult for many people to express an educated opinion on the subject. How this all plays out is impossible to say but one does wonder if we’re going to see any changes prior to the 2007 crop year. With a minority parliament it may prove difficult to push legislative changes through and chances are there will be a federal election next spring at the earliest. Even if the Conservatives were to get a majority coming out of a spring election, it’s hard to imagine them being in a position to have a “dual” market set up for August 2007. One issue that has been noticeably silent has been the legal process that the corn duty appeal is wandering through. We know that back in April the import duty of $1.65 US/bushel was struck down, but that decision has been appealed. How that process works moving forward is a mystery and any result of an appeal likely won’t impact the markets for this crop year.

Wheat: Production and Stocks Take Away:  Although the wheat markets have backed off recently, there are still plenty of supply concerns in many areas of the world including Australia, Europe, Argentina, and the U.S.  Canada’s wheat crop has the potential to be the biggest milling wheat crop in 10 years.  World wheat stocks continue to be drawn down, so the wheat market can’t really afford to loose much value if it wants to attract more acres. Wheat markets have backed off significantly over the past few weeks, with spring wheat closing at $4.59/bushel on August 18, down from a high of $5.32/bushel reached on July 11. The July 11 price is phenomenally high and when the supply scare played itself out there wasn’t much behind it to keep prices at those levels. It’s very much like 2002 when these markets shot considerably higher on drought and poor harvest conditions, only to see the markets back off considerably at the tail end of harvest. That’s been the case with spring wheat. There were expectations that the crop would be under 375 million bushels, as compared to 467 million last year, and when reports started coming back that it may not be as bad as that, and when the USDA came out with a 423 number, the market simply wasn’t able to hold its supply premium. At the same time, the Canadian spring wheat crop appears to be hanging in there, and with any sort of harvest weather luck, we should have a better than average grade pattern and have the biggest milling wheat crop in close to 10 years. There is no duty in place into the U.S. allowing access to the U.S. market of 35 to 40 million bushels that hasn’t been there the past few years.

Argentina is also battling drought concerns. The USDA dropped Argentina’s production 800,000 tonnes to 13.5 million, but many are still thinking there’s another 1 million tonnes to give up. Of note is Argentina and Brazil’s trade agreement, which is very favourable to Argentine wheat moving into Brazil (for other origins there is a 25% import tax on the value of the wheat and a further 10% import tax on the value of the freight). In addition, the Brazilian crop is struggling this year – estimates are for 3.5 million tonnes, down more than 1 million from this year. Point is, the combination of smaller crops in both Argentina and Brazil means less “cheap” Argentine wheat showing up in the world market next December, January, and February. Finally there are also concerns over seeding conditions for U.S. winter wheat. Considerable moisture will be required over the next few months to bring conditions back to any semblance of normal. The question is whether or not prices are high enough to attract the acres. However, if they don’t plant wheat, what will they plant? Plus, they will have a good starting base for crop insurance prices this year, so the acres should be there. But if there are any hiccups coming out of dormancy, wheat markets will be quick to react next spring. So, where are the good crops? China has a good crop and the whole Russia/Ukraine crop that feeds the Black Sea is in much better shape than previously thought. And all things considered, Canada has a pretty good crop with a chance to have the biggest “milling” wheat crop in 10 years. It’s still a bit of a mess on the demand side as the world waits for the big buyers to step up to the plate. No doubt, India will have to stay on a bit of an import program. The USDA has it at 4.5 million tonnes but there’s a good chance they’ll need more than that. Iraq will need wheat sometime soon as it’s been awhile since it issued a tender. The fact that Egypt has been a buyer of wheat lately, specifically North American wheat, is good news. The Europeans weren’t really in the hunt on the last few tenders, which has got to be viewed positively.

Weather-related supply concerns are not over though. It appears this is only a lull in the action. Firstly, there is the Australian crop. The USDA left the 21.5 million tonne estimate alone but most in the trade are using numbers that are smaller than that. The estimates out of Australia over the next few weeks may be a race to zero so to grab the headline, but it’s fair to say that most would be leaning under 20 million tonnes with some as low as 18 million. Not that it can’t rebound, but for the moment the Australian wheat crop is in tough shape. No one is talking 2002 when it had a 10 million tonne crop, but it can happen. Europe had a rough go as it finished off the crop. Drought in the south in July and rain in the north during harvest mean there is still downside to the USDA’s 119 million tonne estimate, even though it was down 7 million tonnes from the July number. Last year, the crop was 123 million (remember the southern Spanish drought) but the year before it was up at 136 million.

No matter how you slice it, the world continues to draw down its wheat stocks. We grew about 598 million tonnes of wheat this year and will use 615 million. The biggest production year the world has seen was 2004 at 629 million tonnes. It’s

possible that we could get to 629 next year, but we’ll need to pull in some pretty big acres. Next year’s demand will likely be 620 million, which means another big crop is required just to cover demand. It’s probably fair to say that the wheat market can’t really afford to loose much value from today’s levels if it wants to attract more acres this fall.

Wheat Prices Take Away:  Minneapolis prices still could go lower, but they are likely closer to the bottom than the top.  Continue to apply the lower quality/lower protein wheat to the DPC and leave the higher quality wheat to the FPC or the pool.  With futures values at the low end of the range and relatively cheap basis levels, now isn’t a good time to sell wheat.

For western Canada, it’s been somewhat disappointing to see spring wheat values crumble in August. Clearly, the better than expected U.S. crop, plus the fact that conditions stabilized in Canada, combined with the large speculative position getting blown out of the Minneapolis pit all pushed values down to current lows. There is still some room to the downside if there needs to be further liquidation of the long but it’s probably fair to say that we are closer to the bottom than the top in Minneapolis. Speculative liquidation could take the market under $4.40/ bushel but that’s probably about it as there is simply not going to be much in the way of hedges coming to the pit from the North Dakota wheat grower. Without a supply situation to spike the markets higher some patience will be needed to push the market up but a trading range of $4.40 - $4.90 probably fits given the current fundamentals.

The slide in futures along with a weakening of the basis has combined to take Fixed Price Contracts down to recent lows. Some have stopped selling FPCs because they are $10-$15 dollars under the PRO. That sort of logic makes some sense deeper into the crop year, but at this time of year it’s pretty useless reasoning. The fact of the matter is that if the PRO were to be issued today, with so little new crop having been sold, you know that the PRO would be significantly lower.

To complicate things moving forward is the adjustment factor that has now popped up into play. The adjustment factor is a way for the Canadian Wheat Board to manage its risk between the current sales position of the pool account and the current futures market changes. Remember that the FPC is a reflection of where the pool is selling wheat today affecting the overall pool account sales position. To this degree, the basis price will be adjusted daily by the difference between the average pool account sales to-date and the current futures price on the percentage of the pool account that is sold. In theory, the higher futures markets go the worse off the pool looks relative to the spot market as the pool account sales values to-date will be lower relative to the increasing futures price moves going forward. In contrast, when futures move lower the better off the pool looks relative to the spot market as the pool account sales values to date are higher relative to the decreasing futures price moves going forward. When futures are increasing, FPCs offered will have to be clawed

back a bit, likewise when futures are decreasing FPCs will be topped up a little. So far over the month high futures prices get negative adjustments while low futures prices get positive adjustments. Though it’s totally unscientific, you can make the argument that the average futures sales so far have been around $4.75. It’s probably not, but that’s the best one can figure without actually seeing the books. It should be noted that at this point in time there aren’t a lot of new crop sales on the books, so changes in futures aren’t going to change the adjusted basis that much. However, as we move through the year the sales will start to pick up and changes in futures will have a bigger impact on the adjustments. Presumably the basis levels offered when the CWB rolls out a new PRO every month will be adjusted to some degree so that the adjustment factors could build through the month if futures change dramatically, but then the factors will decline once a new basis is established. It’s all a bit of a mystery given that there isn’t anything like it to follow, so we’ll just have to see how it plays out as we move forward.

The CWB’s 500,000 tonne limit was filled one day early this year. The one clear advantage to this year’s Daily Price Contract was pricing out old crop wheat against the new crop DPC. This flexibility was used on a lot of wheat and hopefully a lot of it was priced as soon as we flipped the calendar into the New Year. Let’s face it, the first reason for flipping it was to beat the old crop pool. The second reason was to get much of the cash paid out up front, and a third minor reason would have been to beat the new crop pool. In addition, we had been talking about applying lower quality wheat and protein against the DPC and that strategy appears to be playing out. So far the DPC is trading at a significant premium to the FPC for the lower quality wheat. We’re assuming that the current quality spreads on the initials will hold for the FPC moving forward.

The price spread between the FPC and the DPC on the lower quality classes is even more dramatic – on winter wheat it’s more than $20.00/tonne. The danger with signing up the DPC was that you’re open to market fluctuations between when you signed it up and when you could go ahead and price it. As it is, the lowest the DPC on winter wheat has been this year at $171.95/tonne and that would have been in the top third of FPC values that were available up to July 31. Given the relatively high quality and high protein of the U.S. wheat crop it’s fair to say that you should continue to apply the lower quality/lower protein wheat to the DPCs and leave the high quality wheat to the FPCs or the pool. Basis levels have struggled on spring wheat but that’s to be expected with high futures, and quality years. Last year’s basis levels were the anomaly and while this year’s basis levels are low, they aren’t unheard of low, at least in U.S. dollar terms. While U.S. milling wheat basis levels are cheap right now, we do expect them to start to improve, especially as we move out of harvest. Already we are seeing west coast markets reach deep into North Dakota for grain, something that wouldn’t normally happen this early in the crop year. That west coast demand, or lack of Montana supply, will stabilize basis levels in the U.S. and should allow for some basis improvements moving forward. Point is that we’re looking at a futures market that is probably trading in its lower end of the range, as well as basis levels that are also relatively cheap, and it leads one to the conclusion that now isn’t really a good time to be selling wheat. Even though we are saying now isn’t a good time to be selling wheat, people do need to be aware that the CWB will be starting up a program September 1 that will allow people to sell new crop December 2007 wheat futures. Given that we think that it’s not a good time to be selling old crop futures, it’s hard to argue that it’s a good time to be selling new crop futures. Unfortunately there isn’t much carry in the hard wheat markets. December 2007 Minneapolis is only at a 5-cent carry to 2006 and in Kansas City it’s virtually even money. No surprise, given the relative tightness in these markets this crop year and there is little doubt that on rallies the nearby will see the interest. It’s a little different in the soft wheat Chicago market where there is close to a 60-cent/bushel carry December to December, reflecting the fact that there is plenty of soft wheat around this crop year.

With so many question out there with regards to the southern Hemisphere wheat crops along with seeding conditions for the northern Hemisphere winter wheat crops, it’s probably prudent to hold off to some degree. However, pricing orders that reflect light selling on a scale up from $5.00 shouldn’t be excluded.

Durum

Oilseeds: The oilseed markets have been relatively quiet compared to the corn and wheat markets. They haven’t had the same speculative length to deal with, they don’t have the presumed biodiesel pent up demand that corn has, they haven’t had the dramatic crop issues that the wheat market has had, and they’ve got big carryouts relative to demand that the other two don’t have the luxury of.

Take Away:  The U.S. has one of the smallest crops ever.

Soybean Production and Stocks

 The pool is the best place to price durum.

Take Away:

The USDA is expecting durum production to be 55 million bushels – one of the smallest durum crops ever, with only the 45 million bushel 1988 crop coming in smaller in recent years. The resulting carryout is now expected to be only 21 million bushels, which is in line with the 1995 carryout. Of course, if Canada produces a crop of 3.5 million tonnes or more, which it has the very real chance of doing, then we may be able to export more durum to the U.S. Right now the USDA is looking at 30 million bushels of durum imports of which about half would be products from Canada or Italy. The other half would be grain from Western Canada.

It would be nice to be able to recommend pricing out some durum on a FPC, but the fact is there is no signal from the FPCs that it’s the thing to do. Unfortunately, the CWB continues to stick with the same US/bushel price, waiting until it changes the PROs to adjust. This month the durum FPC has essentially equated to US$4.52/bushel. To some degree, it’s been insulated from the fall off in the other markets, but still, the U.S. market has been very firm for durum given the small crop. So, it still looks as though the pool is the best place for your durum to be priced.

 World carryover stocks have stopped increasing which is a fundamental change for the bean market.  U.S. carryout is pegged at 515 million bushels, down from the June estimate of 570 million bushels.

What has changed in the bean complex is the realization that world carryover stocks have stopped increasing. Not that people necessarily believe the current USDA estimate for the U.S. crop, but nonetheless the current world balance sheet has the world producing about 218 million tonnes off beans and using 220 million. That’s a change in the bean market fundamentals. Furthermore, there is still room to take U.S. and world old crop stocks lower, as well as take Brazilian old crop production lower. As for the coming year, there is still debate over what South American production will do, especially Brazilian production. The Brazilian acreage base will more than likely be cut once again by somewhere between 5 and 10%, though some would argue that the cut could even be more dramatic. The USDA estimate of 56 million tonnes for next years crop could be a stretch and that some in the industry are suggesting that a crop of 50 million may be closer to reality.

Soybean Prices Take Away:  Country basis levels are significantly wider than when the Farm Bill was passed in 2002 which is pushing country bids below loan levels at higher futures prices. As a result, farmers stop selling at higher futures levels than in 2002.  It is hard to be bearish about the bean market, at least in the short term.

In its August report the USDA dropped bean yields down just over a bushel to 39.6 bushels/acre. Most weren’t expecting the drop especially when the USDA took the corn crop up over 3 bushels. If the corn crop had managed to come through a hot, dry July does it make sense for bean yields to fade back a little? That’s why the bean market struggled after the report was released – the weak corn market and the quick dismissal of the USDA bean yield as being too low. As we move through August, the bean crop seems to be holding, maybe even improving slightly. It doesn’t appear there will be a repeat of the 2003 scenario when the crop just completely fell apart in August. For the moment the market is probably prepared to trade a yield of 41 something as opposed to 39 something.

Both old and new crop U.S. carryouts have been cut quite dramatically over the past few months. In June, the USDA had the 2005/2006 carryout pegged at 570 million bushels and now its at 515 million. As for the 2006/2007 carryout the initial guess was 650 million bushels but that has since been cut back to 450 million. However, many would suggest the bean crop is at least 1½ bushels too low, which would add 110 million bushels to the carryout, so the 450 may not exactly ring true. The bean carryout will probably pop back up in the September and October reports, but from there chances are good we’ll be able to claw the carryouts back on the presumption that the Brazilian crop isn’t going to make the USDA’s 56 million tonne projection. On the demand side the USDA really hasn’t changed next year’s projected demand, leaving it right around the 3 billion bushel mark. Copyright © 2006 Cargill Limited. All rights reserved.

The bean market basically fell apart on our August long weekend when the U.S. had better than expected rains. There was further weakness when the “bullish” yield report simply couldn’t support the market in the face of lower corn and wheat markets. Though the bean market didn’t have the speculative length that the other markets had, there was speculative selling all along. However, it should be noted that while the speculative length in the corn and wheat pits has been significantly reduced, the bean short has been expanded to the point of holding close to a record position and will be vulnerable to any sort of upward move. One thing to keep in mind is that while local loan levels haven’t changed since the last Farm Bill, interior transportation costs have sky rocketed. As an example, barge freight in the U.S. trades, as a percentage of tariff and the tariff from Minneapolis to New Orleans is around 18.6 cents/bushel. Five years ago barge freight may have been trading at 200% of tariff, making the trip down the Mississippi 37.2 cents/bushel. Now barge freight is trading at 600% or higher, making the trip cost $1.12/bushel. Throw on additional freight costs to get from an interior elevator to a river elevator and there could easily be 60 to 70 cents more in transportation costs from a country elevator to an export buyer. No doubt, FOB Gulf values have risen taking some of this transportation increase into account, but the bulk of the increase has been pushed back to the country elevator bid. As a result, country basis levels are significantly wider than they were when the Farm Bill was passed in 2002 which means local Posted County Prices (PCPs) will drop below loan levels when futures get to the $5.50 level rather than the $5.00

level a few years ago. It means that farmers turn off the selling tap a lot sooner than they used to as the loan “protection” kicks in with significantly higher futures than it used to. There are some counties in the U.S. that now have PCPs under loan. If you took a loan out on old crop beans you have the opportunity to pay the loan back at the lower of loan plus interest or the PCP. As of today, most everyone would be looking to pay back the loan at the PCP. The point is, at today’s futures prices there aren’t going to be many farmer’s willing to sell new crop. May as well stay away from sales to protect against the market going higher, and if it goes lower then you can always collect a bigger LDP. Given that there is already a significant speculative short on in beans, the market is already trading a 41 plus yield, and interior bids are below loan levels, it’s hard to get bearish beans from today’s values, at least in the short term. If we end up pulling off another 43-bushel crop then the market could retreat below $5.50 but the market didn’t spend much time below that mark last year and it’s hard to make the argument that it will this year.

The official old crop carryout number won’t be out until September 12, but chances are it’ll be in the 1.8 million tonne range unless there is a general agreement that last year’s crop was understated. There is probably about 900,000 tonnes left on farm. The commercial stocks are about 850,000 tonnes and another 50,000 tonnes are in condo space. Put it all together and the carryout should be around 1.8 million tonnes. It’s been a phenomenal year for canola demand – a record for crush and for exports. Exports will be close to 5.35 million tonnes, almost 500,000 over the previous record. Domestic crush has been solid right from the get go as the market has found a home for oil in the European biodiesel market which shows no sign of slowing down.

Canola Supply and Demand Take Away:  The carryout could go below 1 million tonnes this coming year.  Demand could jump to 10 million tonnes in the near future which would mean pushing towards 15 million acres, up from this year’s 13.5 million.

All summer we’ve been forecasting around 28 bushels/acre for the current canola crop. It’s a safe bet that yields won’t hit last year’s levels as we just don’t have the 50-bushel crops. But it’s also safe to say there aren’t as many 15-bushel crops as there were back in 2003. As a result, yields will be down from last year but up from the 2003 crop, which puts us, right back at 28, give or take a bushel. One thing is for sure though, over the past few years the crop has outperformed the weather, even in the drought years, so the market will be a little leery about early yield projections getting bigger as we move through the year. Copyright © 2006 Cargill Limited. All rights reserved.

For the coming year, we see the carryout flirting with the potential of going below 1 million tonnes, though we’re not quite at that point just yet. Pull yields down a bushel and we’re talking a carryout under 800,000 tonnes, which would be considered tight. Maybe more important is that we’re currently suggesting that exports will decrease this coming year, not necessarily because the demand isn’t there, but because the farmer may prove to be a very tight holder of seed as we get beyond harvest.

Last year, there was plenty of seed around and available in the commercial system to keep the demand filled. Even today, 900,000 tonnes in the commercial system is quite large. In fact, that would be the highest commercial stock number to start a crop year since 1989. Chances are stocks will rise over 10

the next couple of months as we move through harvest, but after that it’s probably fair to say the bins will be locked down, especially if biodiesel is in the headlines as much as it has been recently. It’s not very hard to envision a scenario in the not too distant future where there will be 4 million tonnes of domestic demand, 5.5 million tonnes of export demand and 500,000 tonnes of dockage/seed demand for a total of 10 million tonnes. It used to be demand consisted of 3 million crush, 1.75 million to Japan, 1 million to Mexico, 250,000 tonnes to the U.S. and then maybe 500,000 tonnes of others. That’s 6.5 million tonnes of “core” demand. Jumping to 10 million and presuming that we can get yields pushing 30 bushels means that we’ll need to be pushing towards 15 million acres in a couple of years, up from this year’s 13.5. And even then production is only meeting demand. The fact is the canola market is setting itself up very well for the next few years. But that’s still down the road and we have to get through the next few months before we can call the market bullish. In general canola futures should be able to gain on the U.S. futures, narrowing in the board crush as we move forward. We’re already seeing that happen as a year ago the board crush was at $97.50, at the end of July it was at $82.50 and today it’s around $70. We could easily see that board crush narrow down into the 50s, especially if the bean market stays flat through harvest and Statistics Canada comes out with a 27 bushel yield. Of course, if we get the board crush down that low, it’s possible we could start to cut off demand. That’s the risk of showing the strength too soon.

Canola Prices Take Away:  It’s hard to see the market going below $280/tonne. However, if it does the basis will likely narrow to encourage selling.

It’s pretty hard to envision the canola market breaking below the $280/tonne mark. With limited down side to the bean market, and an expectation that we’re not going to blow the doors off the canola crop, and we won’t see any late harvest Copyright © 2006 Cargill Limited. All rights reserved.

mammoth yield surprises, a trip down under that level is hard to imagine. You get levels down that low and it will probably mean interior cash bids under $6.00/bushel and below that level it’s hard to see much in the way of cash sales. If for some reason the futures do get pressured under $280, then one has to make the case that we’ll see basis levels narrow in as the farmer is not going to be a willing seller. There isn’t much of a pattern as to when the markets peak in terms of timing. As it is, over the past 26 years the market has peaked between now and the end of October five times in the last half of August, nine times in the first half of September, four times in the last half of September, only two times in the first half of October and six times in the last half of October. It feels as though this year we could be peaking in the last half of October.

Feed Grains: Corn Take Away:  The USDA’s August report forecast a 152-bushel yield – the biggest August yield the USDA has ever reported.  The upside of the corn market could easily be $2.75/ bushel or higher. Given that, now is likely not the best time to sell corn. The collapse of the corn market has caught everyone, including us, by surprise. What we missed out on was the possibility that the large spec would bail so quickly on their long and that commercial users wouldn’t be as quick to take on the ownership that the spec wanted to ditch. Lesson learned in that in the month of August, when most buyers are content to sit back and see how the crop plays out, any sort of spec selling can quickly overwhelm a market. The resulting corn fall out was from a high of around $2.85 in July to today’s values in the 2.35 range, a drop of 50 cents/bushel.

The USDA surprised the market with a fairly large 152-bushel yield in its August report. That was a couple bushels higher than most in the trade were figuring, guessing that the July 11

heat had hurt a number of areas. Some will argue that the number is still too high given that the surveys weren’t nearly as comprehensive in terms of ear weights and kernel counts, as they will be in subsequent reports. To date, August has been a benign month in terms of weather and there probably haven’t been any bushels lost since the August survey was taken, but it remains to be seen as to whether the USDA can improve on the current yield or not. However, big crops tend to get bigger and the August 152-bushel yield is the biggest August yield the USDA has ever come up with.

With the bigger production number the 2006/07 carryout was increased by 155 million bushels. We still aren’t necessarily bullish with a 1.232 billion bushel carryout, but we aren’t bearish either. There are a number of assumptions being built into the demand side of the corn SnD, namely that ethanol demand will increase from 1.6 billion bushels to 2.15 billion this coming year. It’s probably safe to say that as long as the ethanol capacity is there the demand will be there, and for the moment it looks as though the capacity will be there.

another 34 million tonnes off of the carryout in the 2007 crop. While the U.S. may not necessarily be the statistical leader in the world bean market, and it is one of many influences in the world wheat market, it is the corn market. Of the 78 million tonnes of corn expected to be exported this year 54 million will come from the U.S. with Argentina way back in second at 11 million, China at 4 million and the Ukraine at 2 million. While the Chinese crop looks to be solid, there are still concerns about the Argentine crop and any more hiccups out of that origin and the exports will have to come out of the U.S.

It’s been a tough go for the corn market, thanks mostly to the speculators reducing the long but also thanks to the USDA 152-bushel yield that took the pressure off of the supply side. Remember that the U.S. is still carrying in more than 2 billion bushels of corn, which is a lot of corn. Still, futures down at $2.35/bushel are probably representative of a crop that is significantly larger than the current 152-bushel yield, 11 billion bushel crop. And much like beans, wide interior basis levels have pushed local cash prices under loan levels at today’s futures values. As a result, farmer selling is going to be pretty minimal at this time. You can make a case that follow through speculative selling can take the market down to $2.25 but the fact is the upside range could easily be $2.75 or higher. Bottom line, now probably isn’t the best time to be selling corn.

Barley Take Away: Given a continued decline in world stocks it will be interesting to see if the U.S. can hit its 2.15 billion bushel export goal. On the face of it, the dramatically declining world stocks would suggest that it is possible. This year, the world is expected to produce 689 million tonnes of corn and use 723 million tonnes. The resulting 34-million tonne shortfall will take world stocks under 100 million tonnes to 93 million. The big draw down in stocks is to be found in the U.S. where it will drop 21 million and China where it is supposed to drop 7 million. It’s probably safe to say that the world can’t afford to drop Copyright © 2006 Cargill Limited. All rights reserved.

 The weakness in the corn market has affected barley which is now off $8.00/tonne.  Feed barley could be tight this year given the carryout and malt selections.

Feed Wheat

The barley market is following the corn market to some degree but the most important aspect for barley will be the Statistics Canada production number released on August 25. We can easily make a case for 8.9 million harvested acres and a 53-bushel yield. There is no way we have anything close to the yields of the past couple of years but we should be able to beat the 2003 yield. Every bushel is worth 200,000 tonnes of supply so it will be important that we keep the yield up over the 53-bushel mark. We see feed demand picking up, mostly because we don’t see feed wheat being much of a substitute as long as the weather holds and we get a half decent grade pattern.

Much like the corn weakness has spilled over to the barley pit, the wheat weakness has spilled over to the feed wheat pit. Given a tight barley picture and presumably a good grade pattern in this year’s wheat crop it’s hard to see much downward pressure on the feed wheat market. It essentially means that once we clear out of harvest, we should see the market start to get on the hunt for feed wheat, having to reach up to the lower quality wheats and pull them away from the export market. With strong export wheat markets that won’t be easy.

Oats Take Away:  The Statistics Canada production number released on September 25 will be important. Production higher than 3.65 million tonnes likely means $1.80 range, lower could mean $2.00 range.

The sell off in the barley market has been hit by the overwhelming weakness in the corn market. We’re off $8.00/ tonne though you can argue with corn off 50 cents from its recent highs barley has done quite well. You can probably also argue that corn is a better buy than barley right now. But with a carryout under 2 million tonnes, and threatening to go under 1.5 million it’s going to be hard to break barley unless corn wants to break some more. Throw in the fact that the maltsters will probably select more than they’ll grind this year, and they should carryout a record amount of “malt” barley, it’s easy to paint a tight picture for feed.

We continue to have concerns about oat production and what it will ultimately turn out to be. For the moment we’re willing to use a 62-bushel crop giving us a 3.65 million tonne crop, but oats can surprise to both the up and downside. There have been issues in the Red River Valley where the oats were seeded in good time but there was very little in the way of 13

moisture through the growing season. The good news is that the oats seemed to yield quite well given the dryness and the heat. The bad news is that the thin count is very high coming out of a lot of fields. And while eastern Saskatchewan saved the day last year, we aren’t going to have a repeat as many of the oats were put in late and you simply don’t get the yield or the milling quality with June seeded oats.

Recap: While the world hasn’t run out of grain, and it won’t run out of grain this year, it’s certainly heading in that direction. U.S. corn carryout is going to be down significantly and demand continues to roar ahead, creating pressure to produce an 11 billion bushel and bigger corn crop moving forward. The bean carryout, though big, appears to be in check. For wheat, there are all sorts of issues with regards to the various world wheat crops that it’s not hard to make the argument that we’re going to have to continue to try and attract acres to get into the ground over the next couple, three months. And while stocks are declining, it’s the introduction of new demand in the form of bioenergy that is changing the dynamics of the market place. More importantly the dynamics of the new demand are getting mandated into the market. Turn around is fair play after all and it looks as though the next few years could be pretty exciting for grain and oilseed producers.

The balance sheet for oats should tighten up once again this crop year. The carry in of 810,000 tonnes isn’t a lock and it could be a little less once all the official numbers are in for the year. Demand should be good as milling capacity is looking to expand and it’s expected that we’ll see another increase in exports into the U.S. They had a record low oat crop this past year and there have been all sorts of problems recently with the Scandinavian crop. That should allow exports to hit 1.5 million tonnes.

In Canada, it’s no different as a rising tide can lift all boats. We’re already in a position of having to be big importers of corn and as a few more ethanol plants get fired up in Eastern Canada, there will still be the need for imports as we simply can’t get the acres in fast enough to hold them back. In Western Canada, the canola carryout is threatening to go under 1 million tonnes, the barley carryout is threatening to go under 1.5 million tonnes and the oat carryout is threatening to go under 700,000 tonnes. All these levels are considered tight. We still believe the markets are trading towards the bottom end of the trading range in all commodities. Corn futures won’t spend much time below $2.25/bushel, beans won’t spend much time below $5.50/bushel, oats won’t spend much time below $1.80/bushel, Kansas City and Minneapolis wheat won’t be under $4.50/bushel, canola won’t be under $280/tonne, barley futures won’t spend much time under $120/tonne nor will Winnipeg feed wheat. It continues to be necessary for people to have a pricing plan in place to take advantage of the moves in these markets. There will be dips like we’re having right now and the hope is that people will be able to avoid these market pitfalls.

With the corn market dropping hard it’s been difficult for the oat market to hold, and, in fact, it hasn’t. We’ve seen oat futures go from about $2.05/bushel a month ago to $1.85 today. Given that the market is probably at the lower end of the trading ranges in corn, it’s probably safe to say that we’re in the lower part of the trading range for oats. The Statistics Canada report on the 25 will be key with the question as to what side of 3.65 million tonnes will production land. If it’s higher than 3.65 then we could find ourselves battling $1.80, but if it’s lower, and, in fact, the Canadian 2005/06 carryout is under 800,000 tonnes, then prices could quickly be back up at the $2.00 level. Copyright © 2006 Cargill Limited. All rights reserved.

It’s also important that people get comfortable with the options market, whether “put” or “call” options, they are the back bone of our PriceProtector contracts. These contracts provide insurance against unfavourable price moves. Calls give people the opportunity to insure against having sold too early in a rising market and puts provide protection against not selling in a declining market. Understand where you’re breakeven prices are and now that we’re coming to the end of the growing season it’s important to review exactly where you’re costs per acre came out at. It will allow comparisons against your original budget, plus it will give you an idea as to where you can cut back in expenses. More important is that it will give you comfort in knowing what sort of profit you may or may not be making. If you’re confident in your costs, and you see yourself in a profitable 14

position then it’s hard not to get something sold. If the market moves higher then that’s fine as you’ll have more to sell, plus what you’ve sold will already be a money maker. As important as it is to have a sales plan, and finalized your costs per acre, this time of year is when it’s most important to work safely. It’s the time of year when people are working 20 hour days, tractors, swathers, combines, trucks, augers all going at the same time. Ahead of plans and spreadsheets comes safety. There is no question the markets are set up favourably moving forward. Take care of yourself first, take care of your family, then take care of the business.

Report Dates – 2006 September 12 - USDA Crop Production / Supply and Demand September 12 - Statistics Canada – July 31 Stocks in All Positions September 29 - USDA Sept 1 Grain Stocks / Annual Summary for Small Grains production October 5 - Statistics Canada - September Production Estimates October 12 - USDA Crop Production / Supply and Demand November 12 - USDA Crop Production / Supply and Demand December 7 - Statistics Canada – November Production Estimates December 11 - USDA Crop Production / Supply and Demand http://www.usda.gov/nass/pubs/rptscal.htm is the USDA crop Production Calendar website. http://www.usda.gov/oce/waob/wasde/wasde.htm is the World Agricultural Supply and Demand Estimates Report website which comes out on the same day as the crop production reports. http://www.statcan.ca/start.html is the Stats Can website.