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Fundamentals Favor the Bulls

Thursday, September 15, 2005
filed under: Marketing/Risk Management

What a summer it’s been! The market’s expectations for oil seeds, corn and wheat were generally bearish as the planting season was completed. Crops were generally planted in a timely manner with good early season emergence and condition ratings early on. But then too much rain covered eastern sections of the Northern Plains, and the eastern Corn Belt went on to have one of it’s hottest and driest summers since 1988.

The USDA reduced yield estimates of nearly every crop in their August series of reports. We won’t get a production estimate for sunflowers until the October report. It was also a terribly dry year across southern Europe and especially Spain and Portugal. The result of that drought is that Spain’s sunflower crop will be 50% to 60% smaller than last year. Oil World predicts the EU will have to increase imports of sunflower oil, possibly to a new record.

Record high energy prices and the passage of an energy bill in the U.S. will continue to push more industrial consumption of grains and oil seeds in energy channels like ethanol and biodiesel.

U.S. producers planted significantly more acres of sunflowers in 2005 because of great new crop pricing opportunities as early as last winter. Total sunflower planted acres are projected at 2.7 million compared to 1.873 million in 2004. Oil sunflower acres are projected at 2.176 million versus 1.533 in 2004. That’s an increase of 40%.

Crop conditions have generally been favorable, so, at this point in time we would anticipate a sizable increase in crop production. The U.S. sunflower crop still has a critical period ahead. Weather the next 45 to 60 days will determine the extent – if any – of potential crop damage from disease.

A much larger U.S. sunflower is not necessarily bearish. In fact, sunflower prices have remained relatively steady throughout the wild summer soybean market. A 40% increase in planted acres and possibly production isn’t as significant as it sounds because we were coming from such a small base in 2004. Keep in mind that the U.S. imported sunflower oil to satisfy domestic demand. Domestic demand is still very strong and world demand is strengthening as well. And as mentioned from the supply side, the U.S. oil sunflower crop still has a critical period ahead.

The August USDA supply and demand estimates for soybeans reflect how dramatic the changes have been in the U.S. and world soybean outlook in the first half of 2005. Brazil’s soybean crop, once forecast at 66 million metric tons, dropped all the way to just above 50 million metric tons.

U.S. soybean ending supplies, once forecast to approach 400 million bushels, is now projected to decline to 180 million bushels at the end of the 2005-06 marketing year. The U.S. crop is now forecast at just less than 2.8 billion bushels, down over 300 million bushels from 2004 and down 100 million bushels from the July report.

The U.S. soybean ending supply could have dropped to near record low levels in the August report, had the USDA not trimmed their demand estimate by 60 million bushels. It seems unlikely that demand is being rationed with soybean prices the lowest since last May. USDA is also forecasting that soybean oil ending supplies will continue to decline. That should also be good news for sunflower prices over the longer-term.

The final piece of the oil seed puzzle is that there is great uncertainty today over how many acres of soybean will get planted in Brazil. A very strong currency coupled with rising land and crop input costs, and very high interest rates and tight credit, could lead to a 10% to 15% decline in planted acres in 2005. If this happens, the latest USDA estimate for Brazil’s 2006 soybean crop could be too high by a wide margin.

Historically, the best way to participate in a rally in sunflower prices is to maintain ownership of the crop. The relationship between sunflower prices and the soybean oil futures has turned extremely volatile over the last two years, as the demand for sun oil has been strengthening while soybean and soybean oil futures markets have seen very wide and unpredictable fluctuations.

It would seem the 2005-06 marketing year will be similar to last year. A high percentage of new crop sales were recommended last winter when new crop prices were high and Act of God clauses were available. The fundamentals of the U.S. and world oil seed markets suggest prices should go higher in the months following harvest. If this assumption is correct, it would make sense to hold on to sunflowers and consider buying soybean oil call options to cover those new crop sales made many months ago.

Krueger is owner of The Money Farm, a grain marketing consulting company, and can be reached at While the information in this article is believed to be reliable, marketing involves risk, and the author and The Sunflower assume no liability for its use.

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