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Market Volatility Persists; Soy Oil Futures ‘Star’

Thursday, December 1, 2022
filed under: Marketing/Risk Management

By Mike Krueger*
        It’s been another month of volatility in every type of market. The only sure thing these days is that this price volatility is likely to continue throughout the winter and into the 2023 Northern Hemisphere planting season. 
        The volatility hasn’t been limited to agricultural markets. Financial markets have been equally as volatile.  The November elections are now behind us and didn’t result in the “big red wave” as expected and didn’t seem to have a noticeable affect on markets. Two days after the election, however, the latest Consumer Price Index report showed a slight decrease in the inflation rate.  That triggered an amazing rally in the equities markets.
        The grain and oilseeds markets were generally weaker in October and early November.  The November USDA series of reports did nothing to sponsor a bearish or bullish reaction.  USDA raised the corn and soybean yield projections marginally from the October estimates.  Ending supply estimates increased just slightly. 
        The corn and soybean harvests are now complete.  Cash markets never weakened throughout the harvest and still stand at very high levels.  The continued strong domestic demand for corn and soybeans and the tight supply lines keep basis levels strong.  Record low water levels on the Mississippi River system pushed barge rates to all-time highs and limited the flow of corn and soybeans to the Gulf.  Tight farmer selling has also contributed to the strong basis.
january soy oil futures
There is still one element missing to turn these markets more bullish.  That is export demand for U.S. soybeans, corn and wheat.  The 2022 drought-reduced soybean crop in South America hasn’t yet resulted in an increase in soybean export sales, nor have the war and shipping problems in Ukraine yet resulted in increased demand for U.S. corn.  Wheat export demand has been as expected. The fact is that U.S. wheat ending supplies are tight from a relative standpoint.  Russia’s wheat exports haven’t been affected by the war.
        China appears to finally be on a path to reduce Covid lockdowns.  That should mean a return to some level of economic growth and increased soybean imports.  In fact, China did resume purchases of  U.S. soybeans in mid-November.  Soybean sales to China are at about the same level as last year at this time.
        Corn export sales are a different story. They are running about 50% behind year-ago levels.  Most of that difference is in sales to China.  The decline in corn exports from Ukraine hasn’t turned business to the U.S. yet.  That should eventually happen, especially with EU corn imports likely to set a record this marketing year.
        News from Mexico has also put a cloud over U.S. corn exports.  The President of Mexico once again stated that he wants to stop the consumption of GMO corn in Mexico by 2024.  This whole issue started two years ago. Many thought it was behind us, but that isn’t the case.
        The poultry and egg industry in Mexico is huge and very sophisticated.  Most of the industry is located in the center of the country, not along the coastal areas. Most of these operations are very large, and corn is their primary feed ingredient. Most of the corn is delivered to Mexico directly from the U.S. Corn Belt in shuttle trains.  These trains are 100 (or more) cars and transport 10,000 metric tons (about 400,000 bushels). There is no way Mexico can take this volume of corn by vessel and then transload to rail or truck to transport into the interior poultry plants.  They simply don’t have the logistical infrastructure.
        Mexico imports roughly 15 to 20 million metric tons of corn from the U.S. annually.  That is 1,500 to 1,600 shuttle trains. They are our biggest corn buyers.
        The real issue is that it isn’t possible for Mexico to buy that amount of non-GMO corn.  It simply isn’t there from any source.  This will be an interesting story.
        The variance of opinion about the final level of U.S. exports is the difference between bullish or bearish markets.  U.S. soybean, corn and wheat ending supplies are tight enough that larger exports will push supplies smaller and prices higher.
        World weather also remains somewhat uncooperative.  Argentina is still in a drought.  It looks like Argentina’s wheat production will be down more than 50% from last year.  They are planting corn and soybeans in dry conditions. 
        Much of the U.S. Southern Plains hard red winter wheat region also remains very dry.  The winter wheat in this region will go into dormancy with the worst crop ratings in many years.
        The situation in the Black Sea region hasn’t changed.  Putin withdrew from the “export corridor” agreement one day and opened it again the next.  Negotiations are underway to extend the agreement.  Exports from Ukraine are running more than 30% behind a year ago.  Fall planting in Ukraine and parts of Russia were reportedly the latest in more than a decade for a variety of reasons.
        The star of the commodities lately has been the soybean oil futures market.  That bodes well for canola and sunflower prices.  The accompanying chart is the 12-month chart for January soybean oil futures.  It has been very strong despite weakness in soybean futures.                                      
           * Mike Krueger founded The Money Farm, and is now a senior analyst with World Perspectives, a Washington, D.C.-based consulting company.  While the information in this article is believed to be reliable, marketing involves risk, and the author and The Sunflower assume no responsibility for its use.
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