Market Volatility Continues
By Mike Krueger
There has been no easing of the extreme volatility in the markets. This has been especially true in the oilseeds markets. The same market factors are in place that have been affecting markets for many months, and they are, in many ways, conflicting:
• Old-crop supplies of oilseeds and feed grains are extremely tight.
• Old-crop demand for oilseeds, for both domestic crush and exports, is very strong.
• The world is expecting/hoping for record soybean crops in Argentina and Brazil. It has been far too wet in Argentina, but weather has been mostly normal in Brazil.
• World sunflower supplies will be the tightest in years because of smaller production in Russia, the Ukraine, Kazakhstan, the EU and Argentina.
• World feed grains supplies, especially corn, are the tightest ever.
• World wheat supplies are adequate, but supplies among the major wheat exporting countries continue to shrink.
• The U.S. “fiscal cliff” is keeping investment managers cautious.
• Analysts are already projecting more acres and trend line yields for the 2013 crops. If realized, that will be bearish.
The December USDA reports did not change the soybean export forecast, but did increase the crush estimate by 10 million bushels. As a result, soybean ending supplies dropped from 140 million bushels to 130 million bushels. The trade was expecting an increase in the soybean export forecast because the export sales pace has been amazing. We had sold 80% of the USDA’s export forecast in the first 14 weeks of this marketing year. In addition to strong sales, we have been loading those sales at an extremely fast pace.
China, of course, remains the elephant in the soybean room. Its economy has been showing signs of improved growth in recent months, and many economic forecasters are raising China’s 2013 GDP. South America is basically out of the world soybean market until their 2013 crop becomes available.
U.S. soybean oil export sales have been surprisingly large in recent weeks, and this has forced the USDA to make a significant change in their soybean oil export forecast for the current marketing year. In the December report, they raised that forecast from 1,200 million pounds to 1,800 million pounds. That is a very significant increase and will result in U.S. soybean oil ending supplies dropping 40% from last year.
There continues to be a raging argument among the bulls and the bears in these markets. The bulls point to great oilseed export demand amid tight supplies and soaring cash basis levels as reasons for soybean and other oilseed prices to stage a significant rally in the first quarter of 2013. The bears say the odds for a record South American soybean crop are still very high and that South American soybeans will quickly replace U.S. soybeans as soon as the harvest gets underway. This will become a weather story. If weather stays very good in January and February, soybean and oilseed prices will come under more pressure. Weather, however, has not been perfect, especially in Argentina. It won’t stop raining there, and that has caused some significant planting delays and may result in fewer planted acres than expected.
There is a similar bull/bear case in the corn/feed grains markets. Bears argue there is no corn demand and that U.S. corn ending supplies can triple in the next marketing year if trend line corn yields are achieved. Bulls say the 2012 corn crop was overstated and that feed demand is understated.
The U.S. hard red winter wheat crop is off to an awful start because of the ongoing and very severe drought. Some crops people now believe that crop could be as much as 30% smaller than last year even if weather improves next spring. There are also some concerns with winter wheat production in the Black Sea region and the EU. Argentina’s wheat crop was small and has major quality problems because of the excessive rain during the harvest period.
It all will likely boil down to these two key factors:
• The January USDA quarterly stocks and final corn and soybean production estimates. If these numbers are smaller than expected, it will provide a bullish boost to prices. If these numbers are larger than expected, it will be bearish.
• South American weather through February will be crucial to attaining the big production estimates. Any serious threat to soybean yields in Brazil or Argentina will be very bullish.
Certainly, Northern Hemisphere spring and summer weather will be very important because U.S. and world supplies are so tight. But that is a very long time from now in market terms.
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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