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Sunflower Benefits from Strong Soy Oil Market

Tuesday, December 1, 2009
filed under: Marketing/Risk Management

By Mike Krueger

The November series of USDA reports was considered bearish for soybeans and wheat and slightly positive for corn prices.

The national average soybean yield was increased by nearly a full bushel per acre (to a new all-time record), and ending supplies were also increased despite small increases in demand. There was no update of sunflower production. That will come in the final 2009 crop production report to be released on January 12, 2010.

Average U.S. corn yield was reduced in the November USDA report, with corn ending supplies also reduced slightly.

Both U.S. and world wheat supplies were increased in the November reports. The U.S. wheat ending supplies are now forecast to be the largest in 10 years.

There has been a very noticeable shift in the soybean complex trade recently. Soybean oil has made significant gains in the crushing spread at the expense of soybean meal. U.S. soybean oil ending supplies are actually forecast to decline almost 20% this marketing year from last year. World soybean oil ending supplies will decline a similar percentage.

World demand for vegetable oils continues to increase along with improving economies and the increased production of biodiesel. Crude oil has been trading at around the $80 per barrel level, and that also supports the market.

Sunflower prices have been steadily rising in concert with the increasing price of soybean oil and vegetable oil markets in general. High-oil crops like sunflower and canola benefit more from a strong soy oil market than they do from a strong soybean or soybean meal market.

The price risk in the oilseed markets in general is this: If weather in South America cooperates and the anticipated record soybean production is attained, demand should shift to South America and prices should decline. World soybean supplies will be significantly larger than the past marketing year.

Argentina continues to suffer from soil moisture shortages across a very wide area. Extended weather forecasts do offer hope for some relief, and producers in Argentina can plant soybeans well into December; but if the dry pattern persists, the market will take notice.

There also are concerns that soybean planting seed in Argentina has serious quality problems that could affect germination and stands.

Aside from growing season weather and production in South America, soybean demand to China is the next biggest factor in the oilseed market. That demand is remaining very strong as long as China’s economy continues to grow at the forecast rate of 9% to 10%.

The world sunflower situation is different from the world soybean situation for a couple of important reasons.

First, U.S. sunflower acreage has dropped sharply in the last two years, so U.S. production has gotten smaller — even with very good yields. Second, the drought in Argentina has resulted in a sharp reduction in production there as well.

World sunflower oil demand is improving, and supplies are tightening. Sunflower oil is again trading at a significant premium to soybean oil.

The U.S. sunflower harvest finally made progress during the first half of November. The majority of the crop should be harvested before any major snow event. It appears yields are generally very good, while oil content could be slightly below the 2008 level.

Other market factors are still very similar to those outlined in The Sunflower’s October/November issue.

World economic growth appears to be picking up some steam, particularly in Asia and Southeast Asia. The dollar has continued to weaken, and that will help make all U.S. products more competitive in world markets.

There also is mounting evidence that investment money has been rolling into commodity markets in general, and some analysts believe that influx of money will get even stronger early in 2010. The question is whether the flow of new money into commodities can offset bearish fundamental outlooks in wheat and soybeans. That has been the case so far.

Finally there is the very distinct possibility that the January crop production reports could bring changes to the production estimates for corn, soybeans and sunflower because of the very late harvest and wet harvest conditions.

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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