Sunflower a Strong Competitor in Race for ’08 Crop
Tuesday, January 1, 2008
filed under: Marketing/Risk Management
All oilseeds markets have been very strong for a number of different reasons, among them:
• The continuing decline in the U.S. soybean ending supply forecast.USDA’s December supply and demand revisions again lowered the U.S. soybean ending supply estimate, while both the export and crush forecasts were increased. The net result was that ending supplies were cut from 210 million bushels a month ago to 185 million bushels in this report.
• Ongoing strong soybean import demand from China.
• Some minor concerns about weather in Argentina and southern Brazil as their soybean growing seasons get rolling.
• Concerns about 2008 acreage.
• The day-to-day banter in the U.S. Congress over increased renewable fuels mandates that might include the first-ever biodiesel mandate.
Soybean prices have trading at the highest levels in over 34 years, going back to the days just before the 1973 soybean export embargo. Ending supplies of soybean oil were increased slightly because of the increase in the crushing estimate. Soy oil futures prices have also stayed near the highs despite the fact that crude oil prices have dropped $10 a barrel from the highs.
Sunflower markets, both oil and confection, also remain at high levels. In fact, prices for all oilseeds (soybeans, sunflower, flax, canola, etc.) are at or near their highest levels for the year.
World supplies of nearly every agricultural commodity continue to be very tight. The U.S. wheat supplies are now projected to be the smallest in 60 years. The nation’s corn supplies are adequate, but world corn and feed grains supplies are very tight. Even world rice supplies are small and prices the highest in more than 20 years.
I’ve pointed out before that this market rally is very different from every other rally, because new-crop (2008) prices have also rallied. In years like 1988, 1993 and 1996, big markets lasted just a few months — and the high prices never extended to the following year’s crops. Once the event that caused the rally (drought, floods, etc.) was factored in, prices declined quickly.
Farmers face a very good dilemma looking ahead to their 2008 crops — whatever those cropping decisions may be. The big 2007 price rally has flowed right into 2008. New-crop prices for all oilseeds are very close to old-crop price levels.
There are excellent new-crop pricing opportunities for both oil and confection sunflower. NuSun bids for delivery in the fall of 2008 are near $20/cwt delivered to processing plants. Assuming a 45% oil content and 10% price premium for the oil, the price becomes $22/cwt. At a 1,400-lb per acre yield, the gross per acre is $308. Confection bids are around $27/cwt. At a yield of 1,400 lbs, the gross is $378.
But there’s another advantage to new-crop sunflower contracts that other crops don’t offer: both new-crop confection and oil sunflower contracts have Act of God (AOG) clauses. AOG clauses basically mean the producer doesn’t have a production risk. You can contract a specified number of pounds per acre — typically between 1,000 and 1,400 — at the new-crop price.
Should drought, hail, insects, disease, etc., result in a yield loss and you don’t have enough production per acre to cover your sale, the AOG clause kicks in. You are only obligated to deliver what you produced — not what you contracted.
The other benefit of AOG clauses is that if you have a production problem, you will still receive crop insurance benefits that will go to you, not to buy out of a new-crop contract. None of the major crops like corn, wheat or soybeans carry AOG clauses.
The sunflower industry went back to using AOG clauses in contracts a few years ago as a way to entice producers to plant sunflower. It’s important that producers read and understand the rules about these AOG contracts. You must specify things like field locations, and there are specific reporting procedures should a production problem develop.
The race among all crops for more acres in 2008 is probably more intense than a year ago. Last year, corn was the crop that needed to find a significant increase in acres. In 2008 virtually every crop needs more acres.
Farmers have a wide range of crop choices that show very good returns for the coming crop year. Part of the planting decision should include beneficial contracting terms such as Act of God clauses.