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Recent Developments Point to Lively Winter Markets

Monday, November 1, 2010
filed under: Marketing/Risk Management

By Mike Krueger

The markets in July and August were dominated by the severe drought in Russia that turned markets from very bearish to bullish. Markets from now forward will be dominated by the late-summer U.S. weather that reduced the corn yield.

USDA threw the world a shockingly bullish report on October 8 that fundamentally changed the outlook for corn and oilseeds. The most bullish number was the U.S. corn yield: reduced nearly seven bushels an acre from the September report to October. It was the largest change in yield from one month to the next in history.

Most analysts were expecting a yield reduction, but no one expected a cut of this magnitude. Corn ending supplies were dropped all the way down to 902 million bushels. The corn stocks-to-use ratio will be one of the smallest ever. The result was that corn futures prices gained 75 cents in the two days following the report and appear to be headed for $6.00 or higher.

The second big surprise in the October USDA report was that the soybean yield was also reduced when nearly every analyst expected the yield to be increased. Not only was the yield reduced, but the USDA also reduced the harvested acreage by 1.2 million acres.

The net result was a drop of 75 million bushels in soybean production. Soybean ending supplies are now expected to drop from the projected 350 million bushels in the September report (double last year) to 265 million bushels in the October report. As of this writing, soybean futures have gained more than a dollar a bushel since the October 8 report.

There also are other bullish market factors that have quickly become more important since U.S. ending supply estimates have gotten smaller. China continues to buy nearly every soybean in sight, and no one knows the true depth of their demand. What people do know is that China’s demand for soybeans (and everything else) has been underestimated every year for at least the last decade.

The combination of big China demand and smaller-than-expected U.S. soybean ending supplies has increased the importance of big soybean crops in Brazil and Argentina. It has been too dry in parts of Brazil. This is a La Niña year, which can mean dry conditions in some key Brazilian soybean regions. This uncertainty is bullish.

USDA gave us its first sunflower production estimate in the October 8 report, pegging the national average yield at 1,552 lbs/ac. This is virtually identical to last year’s yield. Very little harvesting had been done as of that date, but some very early results were disappointing. Total U.S. sunflower production is projected to be 2.9 billion pounds — down 4% from last season — because of a slight reduction in acres. Harvested acreage of confection sunflower was put at 458,300, up 53% from 2009. Harvested acres of oils were put at just over 1.4 million, down 14% from 2009.

Soybean oil futures have rallied sharply, as have sunflower prices. In fact, all agricultural commodity prices have rallied sharply in the last 30 to 45 days. Demand for U.S. crops is expected to remain very strong into next summer. Corn will be the price leader, with oilseeds tagging closely behind. Wheat will be a follower unless conditions remain dry across the Russian and U.S. winter wheat regions. Of course, weather in Brazil and Argentina will be very important as well as their soybean crops are being planted.

All of this leaves two key questions:

1. How high can prices go? November 2010 and 2011 soybean futures are approaching $12. Soybean oil futures are heading toward $50/cwt. Oil sunflower prices are approaching $20/cwt. You can’t ignore these prices and returns per acre. You ought to be selling into this very steep and very unexpected rally.

2. What will tight ending supplies and high prices mean for acres in 2011? It has become obvious that dwindling supplies, especially of corn, will mean we’ll see a return to the “race for acres” in 2011. Corn needs to somehow find an additional three to five million acres next year. Most other minor crops (flax, barley, oats, etc.) will also need more acres. Soybeans can’t afford to give up acres.

Three months ago, it appeared this marketing winter would be boring and prices would be mediocre at best. The fundamental situation in the U.S. and around the world has changed greatly since then. Add to that the uncertainties that still exist in financial markets, world economies, the November U.S. election and southern hemisphere weather, and this winter will be anything but boring.

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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