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Markets Come Off Turbulent Summer

Monday, September 1, 2008
filed under: Marketing/Risk Management

By Mike Krueger

Markets have witnessed the most turbulent summer in history. While wheat set all-time highs back in March as the world was nearly running out of wheat, corn and soybean markets waited until late June to set new all-time highs, with corn trading above $8 and soybeans trading above $16.

It was a combination of a very wet spring and early June across the Corn Belt (delaying planting of both corn and soybeans) coupled with a spike in crude oil futures to $150 a barrel that brought a frenzy of buying activity to the markets. The presence of the large commodity trading funds had a very big impact. These large funds were holding significant long positions in the futures markets, amounting to as much as 35 to 40% of the open interest.

It wasn’t just soaring crude oil prices and fund buying that pushed prices so high. The delayed planting of corn in Iowa, Illinois, Missouri and other states brought into question how many acres of corn would actually get planted — and also resulted in some concerns about what impact the late planting dates would have on yields.

The wet conditions also pushed back soybean planting progress, as did the fact that cool and wet weather across the southern half of the country slowed development of the soft red winter wheat crop. That caused concerns that soybean plantings might not be as big as expected because double-cropped soybeans on soft red winter wheat acres might not happen if the wheat harvest was delayed. Soy oil prices soared with soybean and crude oil futures, and that kept sunflower prices very high as well.

All of this super bullish activity came to a halt shortly after the 4th of July. Corn and soybean futures markets started to collapse when weather turned from wet and cool to moderate temperatures with frequent rain showers. Extended forecasts calling for a ridge or dome of very hot temperatures across the western Corn Belt never materialized, and the markets quickly removed the weather premium created by the late spring.

At about the same time this was happening, the dollar started to gain strength, and crude oil futures dropped from $150 to near $110 a barrel. All of these factors (plus the ongoing credit and financial problems) started a liquidation phase by commodity markets in general (gold, silver, coffee, sugar, etc.) that eventually saw soybean futures decline by $4 a bushel and corn drop by nearly $3 a bushel from their late June highs. It was a fast and murderous price decline as the market started to factor in much higher corn and soybean yields from the July USDA numbers.

On August 12, USDA released its corn and soybean production estimates — the first ones based on actual surveys, test plots, etc. The corn yield was increased almost 6.5 bushels an acre from July, and harvested acres were also increased. It left most wondering how a corn crop so far behind in mid-June could possibly achieve the second highest corn yield ever.

The soybean yield, on the other hand, was actually reduced from the July estimate by 1.1 bushels per acre. The market wondered how the corn yield estimate could increase so much while the soybean yield declined. Part of the answer is that it has been very dry across the Delta states, and soybean yields were dropped in that region.

The result, at least for now, is that the corn outlook will get somewhat more comfortable (if the yield estimate of 155 bushels per acre holds), while the soybean outlook for the coming marketing year will be every bit as tight as the last one — and that gave us record-low soybean ending supplies.

There are two primary factors that will affect corn and soybean — and, therefore, sunflower — prices from mid-August forward. Weather is still a key issue because of the general lateness of corn and soybean crops. An early frost of any sort will certainly result in yield reductions. The second issue is whether or not the steep price declines will stimulate more demand (or consumption) and eventually reduce ending supply estimates. Another key price component will be whether or not the big fund money decides to come back to the commodity markets. That will likely depend on the value of the dollar and crude oil.

The race for planted acres will again be important for 2009 crops. We are already seeing some early signs that markets are already trying to assess what price levels will be necessary to attract acres. Fertilizer prices have remained (so far) at record high levels. The cost to produce an acre of corn (and other crops as well) has skyrocketed.

Some in the sunflower industry are using the sharp break in corn and soybean markets as an opportunity to draw more acres to sunflower in 2009. You should expect to see 2009 crop prices and contracting opportunities offered much earlier than in the past. It is also likely there will again be Act of God clauses.

Despite the recent price collapses, world oilseed supplies will again be very tight in the coming marketing year. Corn will have a slightly better cushion if the 155-bushel yield estimate holds. The world produced a record wheat crop this year by a very wide margin; yet world wheat supplies will still be among the smallest ever.

In short, we shouldn’t lose sight of the fact that the world still cannot afford to have a crop production problem — even into 2009. There will be plenty of marketing opportunities ahead, especially for sunflower and other oilseeds.

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