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It’s All About Weather & Yields

Sunday, April 1, 2012
filed under: Marketing/Risk Management

By Mike Krueger

World oilseed markets were dominated during the first two months of 2012 by adverse weather in South America that resulted in much smaller soybean production than anticipated at the start of their growing season. Some analysts believe that final South American soybean production could be as much as 18 million metric tons (660 million bushels) below early estimates.

That is a very significant reduction and has changed the overall outlook for oilseed markets heading into the 2012/13 marketing year. If a reduction of this magnitude is realized, it would represent the largest year-to-year drop ever in world soybean production. Soy complex prices rose steadily in January and February, and that rally dragged canola and sunflower prices higher as well.

The lower drift in soybean production wasn’t the only bullish oilseed market factor. Logistical problems in Brazil created a very large backlog in vessel loadings that eventually pushed more soybean export business to the U.S. Also, China became a more active buyer of oilseeds once its Lunar New Year celebrations were completed. Soybean crushing margins in China have improved, and that has prompted talk about better-than-expected demand.

The USDA also contributed to the bullish oilseed psychology. At the same time the market was turning more bullish about soybeans, analysts were turning very bearish on corn and other feed grains. The reason was that everyone expects U.S. farmers to plant at least two million more acres of corn this year.

The USDA supported this idea when its initial 2012/13 supply and demand estimates were released at the annual outlook conference in mid-February. The USDA numbers showed big corn acres coupled with a near-record yield. That combination would result in a doubling of U.S. corn ending supplies at the end of the next marketing year. The soybean numbers, however, actually showed ending supplies declining, based on a much better demand outlook — in part because of smaller South American supplies.

The sunflower outlook is not necessarily supportive on its own. World production and supplies are up sharply from the previous year. In addition, the U.S. bird seed market — which had been the major support for oil sunflower over the last year — has declined sharply because of the very mild winter that quelled demand for bird seed. There also is the potential for a big increase in canola acreage in Canada and sunflower acreage in the United States. Demand for Canadian canola has been very strong, and Canadian canola exports will set a new record this year. There will be four to five million acres to plant in North Dakota alone this spring if the Northern Plains region stays on the dry side. That is a lot of acres, and producers will be looking for crops to plant on those acres.

The March 30th USDA planting intentions report will be very important to market direction. Corn could still be king; but if soybean (and other oilseed) markets continue strong while feed grain prices soften, it could lead to some acreage shifts. Then it will be all about weather and yields. Perfect weather and big yields will obviously be bearish, but the markets need big yields.

Any hint of weather-related production issues will take markets back to the 2011 highs. South American weather has already proven to be uncooperative. How winter-planted crops emerge from dormancy across Europe and the Black Sea region will be the next important market factor, followed, of course, by U.S. spring and early summer weather.

Producers should use this late-winter price strength as an opportunity to complete sales of remaining 2011 crop inventory and get some new-crop sales on the books. An early start to the spring planting season will be initially viewed as bearish.

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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