Ag Market Rallies Will Depend
Saturday, November 1, 2008
filed under: Marketing/Risk Management
by Mike Krueger
What a difference a few months has made in every global market — from ag commodities to energies to financial.
Corn, soybean and energy markets all peaked in late June and early July at prices never seen before. In just three months we’ve collapsed soybean prices by more than 40%, corn down nearly 50% and crude oil off 45% to 50%. Sunflower prices — like every other commodity — have been crushed under the weight of falling markets. Unfortunately, much of the collapse in agricultural markets has little to do with significant changes in the fundamental outlook. Ending supplies of virtually every commodity, while above last year’s record small levels, will still be very tight from an historical and a stocks to use standpoint.
The primary reason for the price collapse is the collapse in the world financial markets that has resulted in massive deleveraging of everything. The credit world as we knew it just three months ago might be gone for a long time. Everyone has witnessed what’s happened in the world’s financial markets. Aside from the massive liquidation that has taken place, the fears of a worldwide recession have also raised concerns that world demand for all commodities will be smaller than expected. If world demand does decline, it likewise means that ending supplies will expand.
In the face of all the bearish inputs from the world’s financial markets, USDA made some very unexpected — and somewhat inexplicable — changes in the U.S. soybean supply and demand numbers.
First, they found an additional 91 million bushels of soybeans in the September 30 quarterly stocks report. They explained that by actually increasing 2007 soybean acres by 1.1 million acres. This adjustment in ’07 acres came more than a year after that crop was harvested. The second surprise USDA gave the soybean market was in the October 10 crop production estimate. There, they did reduce the average soybean yield by half a bushel per acre — but they found another 2.2 million acres of soybeans that they did not have in previous reports. The net result was the crop got bigger even though the yield got smaller. That also meant soybean ending supplies jumped from very tight to adequate with just two strokes of the pen.
The October USDA report gave us the first sunflower production estimate for the 2008 crop. USDA did not break down the numbers between oil and nonoil in this report; they just gave total production. They pegged the overall crop at 3.5 billion lbs, compared to 2.9 billion lbs last year. This year’s overall yield was just slightly above 2007, but harvested acres increased by about 400,000 acres.
Where will the markets go from here? This is the question on everyone’s mind every day.
The fundamentals of the grain and oilseeds markets say we’re too cheap; but until we find stability in the financial markets, it will be difficult to rally any market, including agricultural commodities.
The collapse in all markets came at a difficult time for Argentine and Brazilian farmers, who were making planting decisions. In Argentina, drought has hurt the wheat crop and likely will reduce corn plantings and push those acres to soybeans. Argentina can plant beans into December, so there is plenty of time to wait for rain.
The problem in Brazil is different. Producers there are faced with very high input costs and no way to hedge or sell their new-crop soybeans because credit is tough to find. This implies it will be hard to gain many additional bean acres from last year.
I still believe the U.S. average soybean yield will be cut again in the November report, and this yield reduction will again start to bring down the ending supply estimate, offsetting those “found” acres.
The two major keys to the oilseeds markets, including sunflower, are:
• Will China’s soybean imports remain strong, or will a weaker economy result in a smaller import number?
• How big (or small) will the soybean crops in Argentina and Brazil be?
In the meantime, the uncertainty in markets has brought trade in some of the “specialty” markets to a stop. This includes, to an extent, confection sunflower. The problem is that sales contracts are at much higher levels than current prices. A significant price decline, coupled with the global financial troubles, can create doubts as to how solid the sales contracts might be. It will take time for all of this to get worked out.
Producers have little alternative but to wait and watch through this period of market weakness and financial turmoil. World commodity supply levels are still relatively tight, and most crops will again require more acres in 2009 to satisfy demand.
Mike Krueger is owner of The Money Farm, a grain marketing consulting firm. While information in this article is believed to be reliable, marketing involves risk, and the author and "The Sunflower" assume no liability for its use.