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Use Rallies to Complete Old-Crop & Start New-Crop

Wednesday, April 1, 2009
filed under: Marketing/Risk Management

By Mike Krueger

The markets in general have struggled all winter, with one bearish factor after another keeping a lid on prices. The bearish factors are not new and are led by the ongoing turmoil in U.S. and world financial markets that has continued to create doubts about demand for virtually every commodity from steel and iron ore to grains and oilseeds.

The U.S. crushing rate for soybeans continues to be significantly less than last year, as most sectors of the U.S. livestock industry are operating in the red and numbers on feed continue to shrink. That means reduced consumption of soybean meal. The biodiesel industry also continues to struggle with poor margins and negative returns. The export market to Europe has been about the only profitable market for biodiesel, and now the European Union has decided to initiate import duties that will likely put an end to that market. The result is increasing supplies of soybean oil — even as the crush pace has slowed.

In world export markets, the Black Sea region continues to push surplus supplies from last year’s record crops — including sunflower — into world markets, although that flow has started to slow.

There is still underlying positive fundamental news in the oilseed complex, led by soybeans. The export pace for U.S. soybeans continues to be much stronger than expected, led by very strong sales to China. USDA again increased the soybean export forecast in its March supply and demand numbers and reduced soybean ending supplies down to 185 million bushels, a 25-million-bushel cut from February.

There are still signs the export estimate is too small and the February crush was two to thee million bushels above expectations. This suggests we will see further cuts in soybean ending supplies.

Weather in Argentina improved in February with increased rainfall and moderating temperatures. Nonetheless, Argentina’s soybean crop will likely fall between 42 and 43 million metric tons, about six million metric tons (225 million bushels) below expectations of two to three months ago. Sunflower production will also be down considerably from last year because of the drought — possibly by as much as 30%.

Reduced sunflower acres and crop inputs in the Black Sea region will result in a production drop of 20-25% there, depending on spring and summer weather. Energy markets also seem to be bottoming on production cuts and a slight improvement in demand.

The focus of all of the markets will now shift to what northern hemisphere producers will plant in 2009. The majority of the news and planting estimates, of course, have centered on corn and soybeans, with most analysts forecasting a reduction in corn and an increase in soybeans. There are wide differences in the degree of this corn/soybean acreage shift; but no matter how you slice it, it appears almost a sure bet that soybean ending supplies in the next marketing year could be substantially larger than this year — and that is bearish.

I believe the biggest determining factor in the acreage mix will be spring weather and planting conditions across the northern Corn Belt and Northern Plains. This entire region is saturated, and the spring weather outlook is cool and wet — similar to last year. The later the planting season gets, the better the odds for reduced corn and spring wheat acres and larger soybean and sunflower acres. This also means there could be significant differences between the USDA’s March 31 planting intentions report numbers and the June numbers. It will all depend on weather.

In view of the potentially bearish new- crop oilseeds outlook, producers should use rallies caused by improving old-crop fundamentals and, hopefully, a better world economic outlook, to complete sales of 2008-crop sunflower and start to make new-crop sales. There are still all kinds of market factors that can influence where prices will eventually go; but planted acres and yields are what the market will start responding to in the weeks and months ahead.

Mike Krueger is owner of The Money Farm, a grain marketing consulting firm. 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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