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Volatility & Generally Weaker Prices

Monday, January 2, 2012
filed under: Marketing/Risk Management

By Mike Krueger

The major sovereign debt problems within the Eurozone have gotten worse, not better, in the past month. The EU summit held on December 9 did not result in enough bold steps to soothe the nerves of the world’s financial markets, and the Euro dropped to its lowest level in over a year while the dollar simultaneously rallied to its highest point in the past year.

Financial markets around the world also have become even more volatile with the uncertainty. The U.S. remains far from resolving any of its debt problems, but the focus remains on Europe for now. The rapid rise in the dollar has resulted in generally weaker prices for virtually all commodities, including ag commodities. Gold lost more than $70 an ounce and silver lost more than $2.00 an ounce on one day in mid-December. Crude oil dropped by more than $4.00 a barrel the same day.

USDA’s December supply and demand revisions were also considered bearish to oilseeds markets. They cut the export and crushing forecasts for soybeans and raised ending supplies 35 million bushels from the November forecast. Those changes were about what the soybean market was anticipating; but the increases, coupled with the ongoing mess in Europe, kept any buyers on the sidelines. The pace of U.S. soybean exports continues to be quite slow, with both sales and shipments running well behind last year’s record pace.

Not all of the news is bearish. Expectations for Brazil’s soybean production have started to back off a bit because of fewer planted acres and some dryness in central and southern parts of the country. The latest USDA forecast for Brazil is for a soybean crop of 75 million metric tons. Some private groups within Brazil are now down to 70 million tons. Significant areas in Argentina are also struggling with dry conditions, but production forecasts are still in the range of 50 to 52 million metric tons.

There also are some production problems with palm oil in Malaysia, and prices there have been escalating. Additionally, some analysts believe U.S. soybean oil supplies are overstated because the soybean oil yield per bushel is smaller than being used in the USDA numbers. This could be an important factor down the road for high-oil-content crops like sunflower and canola.

All markets continue to see liquidation of long positions by every group from the small speculators to the traditional funds to the index funds. This liquidation started late last summer when news about the possible default by Greece first hit the markets. Corn, soybean and wheat futures markets are no longer burdened with large fund long positions.

The question for the markets is what will it take now to entice the big speculators to initiate long positions (buy) these markets again? Here are some things that would do that:

• Some positive resolution to the EU debt crisis — or at least the perception that real progress is being made.

• Weakness in the dollar.

• Positive world economic news.

• Weather problems that affect soybean production in Brazil or Argentina.

• Increased buying of soybeans and soybean oil by China.

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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