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Three Factors Pressure Markets
Thursday, December 1, 2011
filed under: Marketing/Risk Management
By Mike Krueger
Three important factors have combined to pressure all commodity markets over the 30 to 45 days prior to this mid-November writing.
The first is that Italy has now joined Greece among the daily headlines over possible defaults on sovereign debt. The European Union’s debt and economic troubles simply will not go away. The result has been wildly volatile world financial markets that resemble soybean futures during a weather market.
The magnitude of the day-to-day volatility in financial markets is unprecedented both in terms of volume and in duration. Bullish headlines today are followed by bearish headlines tomorrow. That uncertainty across virtually every market sector has caused more and more speculators to liquidate positions and move to the sidelines until there is some sign of a return to “normalcy”.
The second important factor is the bankruptcy of MF Global, the very large commodity brokerage firm that tried to become an investment banking firm. Firms like MF Global have come and gone over the years in the commodity brokerage industry. The difference this time was that MF Global apparently comingled customers’ funds with company funds, and more than $600 million in customer funds are gone.
That created a whole new set of problems for the bankruptcy court. Normally, customer accounts would be transferred to another company with the money in those accounts. This couldn’t happen because the money was missing. That, in turn, meant that customers either had to add more money or liquidate positions. It generated another level of uncertainty that also sparked liquidation.
These first two factors were not directly related to grain supply and demand issues. The third factor is directly related to supply and demand. World wheat production has been increased in almost every report since mid-summer. Black Sea wheat is being sold at steep discounts to U.S. wheat prices. There was talk in mid-November of feed wheat from the U.K. and Brazil being imported to the southeastern United States for the poultry industry. That pressured corn prices, and the pressure spilled over into the soybean market.
The November USDA production estimates and supply and demand updates were slightly bearish to soybeans and slightly bullish to corn. Both the corn and soybean yield estimates were reduced again. Soybean ending supplies, however, were increased because the crushing estimate was lowered. Some analysts believe the current crushing estimate is still too high. This, plus the fact that weather in Brazil and Argentina has been good, has also pressured oilseed prices.
China still lurks in the background in both the soybean and corn markets. China’s soybean purchases from the U.S. this marketing year are far behind last year’s number, but soybean sales to China a year ago were at a record level. China’s activity in the U.S. soybean market has started to increase, as has their interest in world vegetable oil.
Another supportive factor to the oilseed market is the fact that U.S. soybean oil stocks continue to get smaller and now stand at about 65% of year ago levels.
Oil sunflower prices have actually moved higher despite the weakness in the soybean complex. The crop is small and world supplies are tight. Demand from the bird seed market has also remained strong.
Oilseed prices going forward will depend upon weather in South America and on China’s actions in the soybean, soybean oil and corn markets.
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.