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Price Moves Now About Demand

Tuesday, November 1, 2011
filed under: Marketing/Risk Management

By Mike Krueger

Markets have experienced one of the most volatile periods in history in recent months. In fact, the term volatile should be replaced with violent. The seemingly never-ending debt problems within the European Union have created an atmosphere of high anxiety that resulted in massive liquidation in every market from financials to all categories of commodities. The liquidation, and sharply lower prices, was fanned by fears that if the sovereign debt problem in Greece spreads to other countries it would result in a slowdown in world economic growth. That, in turn, would lead to reduced consumption.

Agricultural markets were not immune to the liquidation. Corn, soybean and wheat futures lost as much as $2.00 a bushel from their highs. Those steep declines were mirrored by other crops, including sunflower.

The last piece of the bearish puzzle was the very bearish September 30 USDA quarterly stocks report. This report found more wheat and corn than expected. The corn number was especially bearish because it implied that corn used in feed was far less than expected. The same report also indicated that wheat feeding was far less than expected. Analysts were left wondering what the large numbers of animals on feed were eating if it wasn’t corn or wheat?

It was ironic that prices were collapsing while most other fundamental news was actually turning more bullish. Northern Plains wheat and durum production was far less than expected because of the high level of prevented plant acres, plus poor yields. North Dakota, normally the largest durum-producing state by a wide margin, produced less than 20 million bushels of durum in 2011. Corn and soybean harvests are making rapid progress, and it appears yields for both will also be less than expected.

The October USDA crop production estimates left the corn yield unchanged from September, but reduced the soybean yield by 0.3 bushel per acre. Harvested acres of both corn and soybeans were also reduced. Based on actual harvest reports, we anticipate that final corn and soybean yields will be smaller than the October estimates.

October was the first USDA estimate of sunflower production, and there are some very interesting numbers:

• Total U.S. sunflower production is projected at just over 2.0 billion pounds. That is down 24% from last year.

• Planted area, down 12% from the August estimate, is the lowest since 1976.

• The October yield estimate is 1,420 lbs/ac. That is down slightly (40 lbs) from last year.

It will now be up to the demand side of the market to determine whether prices move higher or lower from current levels. Our opinion is that the USDA’s October supply and demand report is underestimating demand for corn and soybeans. While export sales are below year-ago levels, there has been a recent flurry of buying by China, and the weekly export sales have been better than expected for several consecutive weeks.

It is also unlikely that demand has been rationed with corn and soybean prices $2.00 a bushel below their highs. Weather in Brazil and Argentina will also be important over the next several months. Most analysts are again penciling record-large South American crops.

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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