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Next Marketing Year

Saturday, September 1, 2012
filed under: Marketing/Risk Management

By Mike Krueger

July temperatures across the U.S. were the hottest ever, eclipsing the previous all-time highs for July set back in 1936. That heat was the “coup d’état” for U.S. corn and soybeans as the drought of 2012 got worse instead of better as the summer wore on. The result was unprecedented yield reductions for corn and soybeans in the July and August USDA estimates. The August 10th USDA production estimates slashed corn production a whopping 2.2 billion bushels and soybean production by an equally startling 358 million bushels. The projected corn yield of 123.4 bushels per acre will be the smallest since 1995. Corn ending supplies are projected to be 650 million bushels, the smallest in many years and the equivalent of “bin bottoms.” Soybean ending supplies are also forecast to be at “bin bottom” levels of just 115 million bushels.

The U.S. drought follows a terrible production season in South America, where soybean production in Brazil and Argentina fell far below expectations. It was the poor South American soybean crop that sponsored the first leg of the 2012 rally in commodity prices because U.S. soybean supplies were already extremely tight and demand from China continues to expand. There was simply no room for error in Northern Hemisphere crop production. Hot and dry weather also plagued the Black Sea region, with Russia’s wheat production sharply lower than expected.

The result of the world’s crop production troubles has been new alltime high prices for corn and soybeans and big price gains for every other crop, including sunflower. The U.S. and the world will be faced with an enormous job of rationing. It will take high prices over an extended period of time to accomplish the rationing process. The 2012/13 marketing year will likely redefine the meaning of “inelastic demand.” The USDA was forced to make major cuts in demand to prevent ending supply estimates from going negative. The problem is these demand cuts are on paper. It is the market’s job to transform the paper cuts into reality. No one knows for certain what price levels are necessary to accomplish this rationing.

USDA reduced the U.S. soybean crushing and export forecasts to maintain a minimum level of soybean ending supplies. A reduced crush means reduced soybean oil production, and that was reflected in the August USDA report. U.S. soybean oil ending supplies are now expected to be cut by nearly 40% down to 1.295 million pounds. World soybean oil ending supplies are projected to drop by nearly one third from the 2011/12 marketing year. This should translate into strong world vegetable oil prices, including sunflower oil.

Sunflower production in the EU and the Ukraine will be smaller than expected because of dry weather. The Northern Plains of the U.S., where most of the sunflower production is located, fared much better with the drought than the central and southern Corn Belt, and sunflower yields in this region should be average or better. USDA will not release a U.S. sunflower production estimate until October.

There will be wide-ranging implications from the U.S. drought and sharply reduced corn and soybean production coupled with a declining world wheat crop. Markets will remain very volatile, but prices should also remain at very high levels, at least until there is some certainty that soybean production in South America will rebound significantly in 2013. In fact, the soybean market is already anticipating record soybean crops in both Brazil and Argentina three to four months before those crops are even planted. It will also mean the market will again need more planted acres of every crop and strong yields to rebuild supplies.

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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