Bullish Sunflower Prices
Saturday, January 15, 2005
filed under: Marketing/Risk Management
In December, most of the key sunflower market segments began offering new crop bids for sunflower grown in 2005, coming out of the starting gate with contract prices at historic highs.
Larry Kleingartner, executive director of the National Sunflower Association, notes that such high prices so early in the season indicates the seriousness of a demand-driven price. The high crush prices also establish a floor for other segments of the industry – bird food, confection, high oleic – in bidding for ’05 acreage. Contract prices may fluctuate higher or lower as buyers’ needs are met.
What’s driving bullish sunflower prices? In short, supply and demand. U.S. sunflower acreage fell short in 2004, and strong demand for all types of sunflower are driving prices to encourage production in 2005.
Market observers note that sunflower prices have been booming even while soy prices have been falling flat. Sunflower prices in the past have followed Chicago oil futures, but no longer: the price relationship to the Chicago board has been moving further away as NuSun and the domestic market for NuSun have become established.
The Chicago Board of Trade soybean oil futures contract has traditionally been a key price discovery mechanism for sunflower seed prices. In fact, sunflower prices followed the Chicago soybean oil futures price so closely for many years that many sunflower market watchers would deduce a sunflower price from the Chicago soy oil price with a quick rule of thumb formula: dividing the nearby Chicago soybean oil futures price by two and subtracting one.
Example: Futures = $.2500/lb., then the implied cash sunflower price would be: $.2500/2 = $.1250, $.1250 - $.0100 = $.1150
However, that price relationship has changed now that sunflower seed and oil exports declined, and the domestic NuSun crush has risen. The basis levels to nearby Chicago futures oil contracts have historically been a plus one to two cents per pound of oil. The basis is now well over 10 cents.
Market experts agree that sunflower prices are less likely to track the oil board in the future as more domestic markets for sunflower oil are developed. Soybean prices will remain influential, however, and if/when sunflower production exceeds domestic demand, sunflower prices would likely revert back to following the soy oil contract, to price oil for the export market. However, with the labeling of trans fats in both the U.S. and Canada coming in early 2006, there is considerable demand for oils that are naturally stable, and NuSun and high oleic oils are receiving more attention as a result.
Another fundamental change in the sunflower market spurred on by a burgeoning domestic sunflower industry is more production contracting, as evidenced by the activity for ’05.
According to USDA, production and marketing contracts covered about 36% of the value of U.S. ag production in 2001, up from 28% in 1991 and 12% in 1969. Larger farms are using contracts more than other farms, with more contracts in livestock production (nearly one-half) than crops (about 25% in 2001). About 88% of the production value of poultry and eggs and 61% of the value of hog production was contracted in 2001. Contract use varies sharply across crops, ranging from about 6% of wheat production and more than half of fruits and cotton in 1991 to almost all sugar beet production.
Crop producers interested in growing sunflower are encouraged to check out their new crop pricing options at local elevators, as well as with the various companies and processors that contract sunflower. – Tracy Sayler