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No Letup in Wild Markets

Wednesday, April 2, 2008
filed under: Marketing/Risk Management

It has been an incredible couple of months in the markets. That goes for financial markets as well as commodity markets. Virtually every agricultural commodity futures market soared to new all-time highs.

The big price rallies were accompanied by increasing volatility. Daily limits on wheat futures were increased to 60 cents a bushel, and the daily limits on corn and soybeans were increased to 30 and 70 cents, respectively. Soybean oil futures also ran quickly to new all-time highs on big demand for soybeans and soybean oil to China.

The sharp run-up in soybean oil futures also brought cash prices for sunflower and canola to new highs, both in the old-crop and new-crop positions.

The agricultural markets — in fact, all commodity markets — have been super strong for months because of very big demand and declining supplies.

Another major factor has now been introduced into the equation that is even harder to analyze than the commodity markets: the meltdown in the U.S. financial markets. The sub-prime mortgage problems that started to surface last summer have gotten worse, not better. The March demise of Bear Stearns sent another shock wave through every market. The trouble is, no one knows just how big the mortgage-based problem is. It has prompted more recession talk. There have also been a number of hedge fund failures resulting in liquidation of positions in nearly every market.

All of this has added to the volatility of the markets. This increased volatility has meant increased margin requirements for futures transactions — which, in turn, has forced many companies, including major grain companies like Cargill and ADM, to stop buying new-crop grains and oilseeds except on basis-only contracts. This is an unprecedented move, and means that producers who want make new-crop sales will have to open their own futures account and make the margin calls. The capital requirements to carry large hedged positions in these markets have become too burdensome even for the giants to maintain.

An exception is the cash new-crop contracts for both confection and oil sunflower. In these cases, end buyers are supporting those prices. Thus, new-crop contracts have not been pulled or altered in the same manner as the contracts supported by the futures market.

So the real question is, are these bull markets finished or are they just taking a well-deserved break? There are a number of significant factors that will affect prices in the weeks and months ahead:

Have we seen the bottom of the financial markets? Will the U.S. economic slump spread to other parts of the world — and will that affect demand?
What does the March 31-released planting intentions report tell us about what U.S. farmers intend to plant in 2008? The market has been assuming a significant increase in soybean acres and a corresponding decline in corn. Since every commodity — including sunflower — wants/needs more acres in 2008, what will these acreage estimates mean for the 2008/09 supply/ demand numbers?
The March 31 quarterly stocks numbers will also be important because they will verify consumption during the December/January/February quarter. These numbers are closely watched when supplies are tight.

Looking at potential supply and demand analysis for the 2008/09 marketing year, it still seems obvious that yields must be very good for every crop or we will have another year with very tight supplies. In fact, in the case of corn and soybeans, good yields are essential to prevent ending supplies from declining further. This, of course, means that weather will be an even bigger factor throughout the spring and early summer than normal. It also means all the markets will likely stay very volatile well into the next marketing year. It doesn’t appear that we can produce our way out of the current tight supply situation in one crop year.

The situation for the minor oilseeds (canola, sunflower) has been equally interesting. The rapid push to all-time highs in soybean oil futures also took prices for canola and sunflower to all-time highs, including new-crop values. New-crop confection sunflower prices jumped to in excess of $37/cwt in an effort to draw acres. These high prices occurred during the month of February when the federal crop insurance minimum price guarantees were established.