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Why Oil SFs Haven’t Rallied; Bullish Factors

Friday, January 1, 2010
filed under: Marketing/Risk Management

By Mike Krueger

The soybean market has continued to trade near the top of its price through the middle of December, as this is being written. Demand for U.S. soybeans and soybean meal has remained exceptionally strong — and for a longer period of time than most analysts expected. November’s soybean crush set a new record of 160 million bushels. Soybean export sales to China continue to occur at a record pace, having totaled 8.2 million metric tons (nearly 700 million bushels) as of mid-December. That compared to last year’s total at the same point of 10.7 MMT (just below 400 million bushels). USDA’s November report reduced soybean ending supplies slightly, but not as much as most analysts were expecting, given the strong demand.

The oil sunflower market has been basically steady despite the relative strength in the soybean complex. The failure of sunflower prices to rally in concert with the soybean complex has left producers concerned that sunflower prices will not be able to rally, should the soybean market eventually move lower as the projected record South American crop becomes available.

There are a number of reasons why the oil sunflower market has been stagnant. First among them is that we had a significantly large carry-in of old-crop sunflower supplies. Those supplies migrated to the market through the summer and early fall as producers made room for the record-breaking (or near-record-breaking) crops of spring wheat, durum, barley, etc.

The second reason the sunflower market has been unable to sustain any rally is that there also was a substantial quantity of new-crop sunflower contracted last spring when prices were much higher than current values.

Both of these issues resulted in processors having plentiful — even surplus — supplies of sunflower on hand coming into and through the harvest period.

The price relationship between sunflower and the soybean complex has ebbed back and forth over the years. Today, the relationship is ebbing on the low side. But that will change.

There are a number of bullish factors surrounding the sunflower market that should eventually lead to higher prices as we move toward late winter and spring. Among those factors:

• World sunflower production is down significantly from last year, with big declines in Argentina, the Ukraine and Russia.

• Demand for sun oil has remained very strong, and some world crushers are struggling to cover their sunflower needs because of the production declines from their traditional suppliers.

All of this could —repeat, could —mean there will some exports of U.S. sunflower seed before the end of this marketing year. That has been a very rare occurrence in recent years.

The January 12 USDA reports will be significant to every market. These reports will contain the “final” production estimates for corn, soybeans, sunflower and canola. It will be important to see whether the very late harvests of these crops resulted in fewer harvested acres and any yield reductions.

Supply and demand revisions also will be released on the same day. Soybean and corn ending supplies should decline. The quarterly stocks report and first “official” estimates of U.S. winter wheat plantings will also be released. I anticipate that winter wheat planted acreage will be three to four million acres below last year, primarily because of the late row-crop harvest and wet soil conditions.

Markets these days are not just about supply and demand. They are equally affected by other issues — like the gyrations in the values of the dollar, energy prices, metals, financial markets, etc. And we can’t forget the influence of the various funds on futures market prices.

One of the big debates is whether we will see more outside investment money flow in to commodities early in 2010 — and, if so, toward what commodities? The general belief in the trade is that more investment money will indeed come to the commodities, and that agricultural commodities will see their share of that money increase at the expense of non-agricultural commodities like energy.

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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