Page 1

Market Report

GrainSense™

Volume 3

Issue 8

August 2006

East

Table of Contents

To do:

Wheat

q FuturesFirst on home stored deferred wheat Soybeans

q GPOs on cash beans at $6.25/bushel q Examine the value of PriceProtectors on soybeans

Corn

q GPOs on cash corn at $2.75/bushel q Examine the value of PriceProtectors on corn

General

q Review the 2006/07 cost of production spreadsheets

q Harvest safely

General Overview

Page 1

Farm Policy

Page 4

Wheat

Page 5

Oilseeds

Page 8

Feed Grains

Page 11

Recap

Page 14

General Overview Weather Markets Cool Off 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. 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. With no supply story, the speculative side of the market 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.

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The USDA accounted for the high eastern yield, offsetting some of the poor western yields, when it posted a corn 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 bushels. 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 Dakotas where South Dakota dropped from 119 to 100 and North Dakota went from 129 to 102 bushels. 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 out 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 as well. 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. 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 quite ring 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.

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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. As we move forward, with corn and oilseeds taking on more ground, wheat will have to respond to keep its base acres given that 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.

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

Ontario Harvest In Ontario, we are looking at what could be excellent crops. The wheat crop looks as though it’s going to be a record with the chance that the overall provincial yield could hit 80 bushels for the first time ever. The corn crop looks good with many saying that it’s equal to or better than a year ago. Of course, last year we had a 145-bushel provincial yield, which was massive when you consider that the previous record was 131 bushels. A trend line yield for Ontario corn would be 129 bushels, but for the moment it looks like at least a 135-bushel crop. As for beans, trend line yield is around 38 bushels but we should be able to get up to 40 bushels. Soybean yield has been over 40 bushels a number of times, including last year, and we should be able to do it again.

The Funds

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.

Over the past week the CRB index has lost some lustre 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 Copyright © 2006 Cargill Limited. All rights reserved.




Farm Policy

Wheat

Take Away:

Production and Stocks

• WTO negotiations have concluded with no agreement. • 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 meantime, 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. 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 lose seats in both the House and the Senate, they won’t lose 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 sit 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 will be structured – a step forward since in the past the dual market will 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 US$1.65/ 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.

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 lose 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 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. which allows access to the U.S. market of 35 to 40 million bushels – that hasn’t been there the past few years. 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

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smaller than that. The estimates out of Australia over the next few weeks may be a race to zero 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. 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.

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 lose much value from today’s levels if it wants to attract more acres this fall.

Soft Red Wheat Take Away: • The market signals are saying keep your wheat at home right now if you have space. So consider selling the March or May to capture the carry in the market. • We’re expecting nearby futures to be in the $3.60 to $3.85/bushel range – further difficulties in the southern hemisphere could push it up over $4.00 though.

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 positivel.

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The issue for the soft red wheat market continues to be the big rebound in U.S. production and the need to increase exports considerably from last year’s levels. In the August report, the USDA did increase SRW production by 5 million bushels but thought it best to stuff the additional demand into domestic use. It’s going to have to go into the flour grind as opposed to the feed market as these wheat prices are way too high to be fed. The concern for the market is that the export demand won’t be there to take away the 120 million bushels needed to keep the carryout under some semblance of control. We have been seeing U.S. wheat be priced somewhat competitively over the past few weeks, which is somewhat comforting. Most important is that the Egyptians are showing up for a little bit of U.S. wheat and it’s that market that needs to be a consistent buyer of North American wheat. The concern had been that European and Black Sea wheat would pound away into the market, but with Europe’s recent harvest problems the hope is that we can get a jump-start into that export market.

The concern about finding export homes plays out in the futures markets where Chicago futures have very wide carrying charges. On August 21, September 2006 futures closed at $3.65 ¾/bushel yet the May 2007 futures closed at $4.13 ½. People often make the mistake of thinking that these carrying-charge markets reflect a bullish market scenario when in fact they signal a market that has too much grain around right now. In effect, sellers are willing to offer down the nearby position just to transfer ownership and move grain forward. It’s not really a question of “I really want your grain later”, it’s more a question of “I really don’t want your grain now”. It certainly says that if you have space for your wheat you “hedge up” your ownership by selling the March or May or whenever you plan to move your grain, so that you can capture the carry in the mark

Copyright © 2006 Cargill Limited. All rights reserved.

Chicago has had a bit of a rough go over the past few months. Clearly the wheat market was parking many of the production concerns in the more liquid Chicago market, but as SRW crop prospects improved the length was rolled to Kansas City and Minneapolis. Plus, the market decided that it made more sense to park Chicago length in corn rather than wheat. So it peaked in May and has faded since, save for a small run in late June/early July when the spring wheat crop looked to be burning up. As it is, the market has fallen right back with the September futures trading in the $3.60s and the December down to $3.80. At these levels the market probably doesn’t have a lot of downside left though the real question is whether the market can hold the carry moving forward or if the carry will fade moving forward, as it typically does. We suspect that the nearby futures should be able to spend much of their time in the $3.60 to $3.85 area and we’ll need some confirmation of further difficulties with the southern hemisphere wheat crop to get nearby Chicago trading up over $4.00.




Ontario Wheat Situation Take Away: • A massive winter wheat crop is expected which means some will have to be shipped overseas. • Ontario cash prices are likely at the cheapest levels for the year so consider selling the futures carry and wait for basis levels to improve in the early part of next year.

We’ve heard nothing but good things about this year’s wheat crop. A trend line yield says that it should be able to hit 75 bushels and the previous record was 2003’s 76 bushels. To think that we can hit 80 bushels as a provincial average isn’t that much of a stretch.

Remember, the real “problem” wheat is the soft red if you assume that 70% of the production is made up of that class. The 30% balance is probably split between soft white and hard red and the North American market can easily absorb the 350,000 tonnes of each. The problem is the soft red and that whole 900,000 tonnes is eventually going to have to go offshore. Harvest basis levels have had to decline to market-clearing levels in order to move wheat forward and through the system. Chances are these levels are going to stay “cheap” right up until bean harvest and then the need to move wheat forward will stop as people look to get organized for big bean and corn crops. It certainly all points to today’s Ontario cash prices as being the cheapest available for the year, with the best play being to sell the futures carry and wait for a basis appreciation to happen in the early part of the calendar year.

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 pent up biodiesel demand corn has, they haven’t had the dramatic crop issues the wheat market has had, and they’ve got big carryouts relative to demand that the other two don’t have the luxury of.

Soybean Production and Stocks Take Away: • 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.

An 80-bushel yield on 1.1 million acres equates to a winter wheat crop of 2.4 million tonnes. That’s massive and as a result we’ll have to ship something overseas. Typically, we can probably use 750,000 tonnes in Canada between the mills and the feed market, another 750,000 tonnes moves into the U.S., but that ultimately means that 900,000 tonnes has to be sold into the offshore market. That job is getting done to some degree as we know of 300,000 tonnes that was sold to India and there is close to another 300,000 tonnes sold to Egypt. That’s probably enough for the moment as there will be dribs and drabs sold to others, plus you simply can’t logisiticate that much wheat out of Ontario in such a short period of time. Copyright © 2006 Cargill Limited. All rights reserved.




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 of beans and using 220 million. That’s a change in the bean market fundamentals.

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.

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 year’s crop could be a stretch and some in the industry are suggesting a crop of 50 million may be closer to reality.

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.

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 it’s 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.

As we move through August, the bean crop seems to be Copyright © 2006 Cargill Limited. All rights reserved.




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.

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 farmers 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 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.

Ontario Soybeans Take Away: 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 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 skyrocketed. 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 Copyright © 2006 Cargill Limited. All rights reserved.

• At least 15 million bushels of crush beans will need to be exported this year. • The futures market is showing big carries due to ample supplies of physical beans currently. So, if you have to sell beans, consider an out-of-the-money Price Protector.

Ontario bean production should be lower this coming year mostly thanks to the lower acreage base. Essentially, some of the additional wheat acres slide over to beans. The overall Canadian bean acreage is up slightly but basically what was lost in Ontario was more than gained in Manitoba, and those beans by and large won’t impact that Ontario market. There will be about 12 million bushels of Manitoba beans that will mostly make their way down into crush plants in Minnesota and a few may make it to the export food bean market off the 


west coast. There could be 1 or 2 million that get railed down east but it won’t be enough to upset the market given that Ontario will be producing between 85 and 90 million bushels. For Ontario, the issue will be that the crush industry typically uses between 60 and 65 million bushels a year, of which at least 15 million are imported from the U.S. That leaves about 45 to 50 million bushels of local crush demand open for Ontario beans. Throw in 10 to 15 million that would normally be exported to the food market, 10 million that could be roasted, and you still have to export 15 million bushels of crush beans. In Ontario, basis levels are reflective of what it takes to move beans through the system as well as what it takes to move beans through and over the wheat that is starting to pile up in the terminal elevators. Ontario Canadian basis levels have taken a bit of a hit with the lower futures, but the fact remains the overall interior basis structure is lower because of the overall increases in transportation costs. There are big carries in bean futures for the very same reasons that there are big carries in the Chicago wheat futures. It’s all a function of more than enough physical beans available right now. The oversupply of nearby beans is reflected in both the big futures carry along with the “cheap” basis levels. Again, much like wheat, it’s a question of selling the carry but it’s hard to sell futures that are in their bottom third of their historical range. At least when you’re selling wheat futures, especially the deferreds, you’re selling futures in their top 10%. If you have to sell beans, it probably makes some sense to also price in some sort of cheap out-of-the-money PriceProtector.

The USDA surprised the market with a fairly large 152bushel yield in its August report. That was a couple bushels higher than most in the trade were figuring, guessing that the July heat had hurt a number of areas. Some will argue the number is still too high given 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 whether the USDA can improve on the current yield or not. However, big crops tend to get bigger and the August 152bushel yield is the biggest August yield the USDA has ever come up with.

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 is 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 fallout was from a high of around $2.85/bushel in July to today’s values in the 2.35 range, a drop of 50 cents/bushel. Copyright © 2006 Cargill Limited. All rights reserved.

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.

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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.

Ontario Corn 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 another 34 million tonnes off of the carryout in the 2007 crop.

• High yields in Ontario for wheat, beans, and corn mean there isn’t enough elevator space to handle everything which has weakened basis levels. • Given weak basis levels and low futures prices, it’s hard to recommend off-combine sales.

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. For Ontario, the question continues to be one of whether or not we can beat last year’s 145-bushel yield. So far we’re willing to go with 135 bushels with the realization that the crop looks fantastic. Of course, last year there was perfect weather through September, so the question is whether or not we can repeat last year’s finish. You can probably argue that this year’s crop looks better than last year’s at this point since this June’s weather was a lot better than last June.

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. Still, futures down Copyright © 2006 Cargill Limited. All rights reserved.

Based on the 135-bushel yield, production will be about 220 million bushels versus last year’s 227 million. Against a “normal” Ontario demand of 280 to 290 million bushels, we’re short 60 to 70 million bushels. Adding 10 bushels to the yield means imports need to drop to 45 million. If you make the case that the carry in can afford to be drawn down by 20 million then it could be that our import needs are reduced to only 25 million bushels. So 25 million is the low end of the import needs but that doesn’t necessarily mean that prices have to spend harvest at import equivalent. Right now, the Ontario market is looking at what could possibly be record yields all around the horn in 11


wheat, beans, and corn. There isn’t necessarily enough space in the elevator system to handle everything so all basis levels are weak. In U.S. dollar terms we don’t see corn basis levels getting a lot cheaper, maybe a nickel or a dime, at most. At some point Ontario will need to import U.S. corn – just not right away. There won’t be the uncertainty of a duty that we had a year ago holding back sales. It doesn’t look like we’re going to have the uncertainty of a small crop and a delayed harvest like we had a few years ago. In other words, there is plenty of corn in the pipeline. Just look at the carry in the market – from spot to new crop there is a 20 to 30 cents. When you’re supposedly in a deficit situation that shouldn’t be happening. With futures down into cheap territory at $2.35 and basis levels weak, it’s hard to recommend off-combine sales at this point. Ontario new crop cash prices are probably in the $2.40-$2.50/bushel range and it’s probably fair to say that there’s at least a 25-cent upside with minimal downside.

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 to 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. Turnaround is fair play after all, and it looks as though the next few years could be pretty exciting for grain and oilseed producers.

canola futures won’t be under $280/tonne, and 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. It’s also important that people get comfortable with the options market. Whether “put” or “call” options, they are the backbone 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 your break-even prices are. 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. This 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 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 finalize 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 with tractors, swathers, combines, trucks, and 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 and your family first, then take care of the business.

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, Copyright © 2006 Cargill Limited. All rights reserved.

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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 1st 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 Statistics Canada website.

The information provided in this report was derived from sources that Cargill Limited believes to be reliable. The opinions, estimates and projections contained herein are those of Cargill Limited as of the date of this publication and may change without notice. Cargill Limited, its employees and agents, do not guarantee the accuracy or completeness of the information contained in this publication and make no representations or warranties, expressed or implied, as to expected results. Cargill accepts no liability for any loss arising out of any use of or reliance on this publication or its contents. Nothing in this publication, or anything else provided to the customer in connection with the applicable marketing service shall be construed as advice with respect to dealings in commodity futures or options contracts. ® & ™ - Unless otherwise indicated, ® identifies registered and ™ identifies unregistered trademarks of Cargill, Incorporated used under licence. FARMLOGICS is a trademark of Cargill Limited.  © 2006 Cargill Limited. All rights reserved.

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