Price Volatility Ongoing
Wednesday, February 1, 2012
filed under: Marketing/Risk Management
By Mike Krueger
Two primary factors have been affecting the markets since mid-December.
The first and most significant was the hot and dry weather that encompassed most of Argentina and southern Brazil during the month of December and early January. The markets have been operating under the assumption that Brazil and Argentina would produce record corn and soybean crops in 2012. That was obviously a bearish assumption. The dryness in Argentina has already reduced the corn yield by as much as one-third, according to Rosario (Argentina) Grain Exchange estimates. The corn crop was pollinating during the hottest and driest period of time. Corn in southern Brazil was also likely hurt during pollination, but not to the extent of the problem in Argentina.
The soybean crop is much later than corn in terms of development and can still benefit from moisture. Some beneficial rains did fall in early January, and temperatures moderated. Nonetheless, it is doubtful that soybean production in Argentina or Brazil will meet previous expectations.
Corn and soybean futures markets staged significant rallies during the last half of December because of the weather troubles in South America.
The second significant market factor in the markets was the series of USDA reports released on January 12. Many analysts were looking for slightly bullish corn numbers and neutral wheat and soybean numbers. USDA increased the corn and soybean yield estimates slightly. The USDA quarterly corn stocks estimate was also well above the trade guesses. The soybean export and crush forecasts were increased and soybean ending supplies were increased. The corn export forecast was increased and ending supplies were left almost unchanged.
The problem was that the market got caught leaning to the bullish side on corn, and a perceived bearish report resulted in a 40 cents limit down move for corn. The wheat numbers were neutral, but selling pressure in corn and soybeans pushed wheat lower following the January report as well.
The January USDA reports also gave us final 2011 sunflower production numbers. The 2011 U.S. sunflower crop was pegged at 2.04 billion lbs. That is down 25% from 2010 because of a 21% drop in planted acres and a slightly lower yield. Acreage and production was the smallest since 1976. It is important to keep in mind that the super wet spring of 2011 resulted in nearly 20% of North Dakota’s total crop acreage lost to prevented plant. There should be a sharp rebound in planted acreage for all crops in 2012 if weather cooperates at all.
Improved weather in Argentina, coupled with the bearish USDA reports, has resulted in another sharp break in commodity prices. The value of the dollar has also soared as the economic and sovereign debt problems in the Euro zone have gotten worse, not better. A strong dollar is perceived as bearish for commodity markets in general.
Where do markets go from here? Not all of the news is bearish. We are still in a weather market in Argentina and southern Brazil. A much wetter pattern will be needed to stabilize corn yields and improve soybean yields. A return to a hotter and drier pattern in late January and early February will still affect the oilseed markets in a positive way.
The major long liquidation by trading funds has nearly run its course.
Oil yield from the 2011 U.S. soybean crop has been below expectations. This, plus the USDA’s reduced estimate of soybean crushing, should mean that oil supplies will continue to tighten. This tightening will eventually have a positive impact on high-oil-content crops like sunflower and canola.
Price volatility will likely remain a constant as we move into 2012 and get closer to the 2012 Northern Hemisphere planting season. There are concerns about dryness in the Ukraine and the central U.S., as well as in South America. This volatility should continue to create big price moves — both higher and lower. Producers should use this volatility to make sales on price rallies.
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.