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Historical Volatility

Saturday, September 15, 2007
filed under: Marketing/Risk Management

By Mike Krueger

The past six to 12 months in the commodity markets have been more volatile than any other period in modern history, at least that I can remember.

Corn started the parade higher by rallying prior to the 2006 harvest and reaching a peak in late June. Corn prices declined a dollar from the June highs in July while soybeans and wheat were setting new contract highs.

Corn won the race for acres in 2007, gaining more than 14 million planted acres from 2006. Nearly every other crop lost acres in 2007, with soybeans the biggest loser. Soybean acres declined 7.4 million from 2006. The result is that corn ending supplies will be larger than expected, while soybean ending supplies will decline to nearly bin bottom levels.

Wheat has also been a story by itself. The world’s wheat crop in 2006 was very small because of severe droughts in Australia and the southern U.S. The 2007 world wheat crop was once expected to make a significant rebound, but as the season progressed, virtually every country that produces a wheat crop has had problems.

The U.S. winter wheat crop struggled with a major freeze, disease and a wet harvest. All of Europe was very dry early followed by rainy weather that is still stalling the harvest and reducing yields and quality. The Black Sea region (Russia, Ukraine) also suffered from drought. North Africa’s wheat crop was badly hurt by drought. Argentina and Australia are the last hopes for major wheat exporting countries and there are some lingering troubles in those two countries as well.

The world’s sunflower crop is beginning to resemble the world’s wheat crop. This makes sense because much of the world’s sunflower crop is produced in the same countries that are the biggest wheat producers. The problems started last winter in Argentina, when yields were hurt and the crop came in much smaller than expected. The same drought that hurt wheat crops across all of Europe also cut into sunflower production.

Oil World now predicts the world sunflower crop will be at least 10% smaller than last year. By contrast, the U.S. sunflower crop looks very good, as the Northern Plains missed much of the excessive mid summer heat and received adequate rainfall. U.S. acres, however, did not gain from 2006, and it looks like harvested acres will be about the same as last year. Yields should be better than last year. The result of strong demand and a smaller world crop is that prices of sunflowers and sunflower oil are at very high levels, and some rationing will have to occur.

It’s important to remember that the sunflower situation is really a microcosm of what’s happening in world agricultural commodities in general. Consumption has been exceeding production and ending supplies are declining. This year’s production problems accelerated the pace of declining supplies, but the trend has been in place for several years.

The biofuels movement has accelerated the consumption of corn, sugar and vegetable oils, which in turn has pushed producers to plant more of those crops. The problem in 2008 will be that virtually every crop will need more acres and increased production to prevent their respective ending supply situation from declining even further.

This is the reason that 2008 crop prices have been following the rally. Typically, weather related rallies would be felt in the current marketing year with the next year’s prices at severe discounts. That has not been the case this year. 2008 crop corn and soybean prices are actually higher than 2007 crop prices. Only wheat shows a steep discount to current price, but 2008 wheat futures are still near $6.00.

There are other factors at work in commodities markets that have added and will continue to add to the market’s volatility besides tight fundamentals. There is obviously a rapidly growing influence of “outside” or investment cash in every market. The recent sub-prime mortgage problems have resulted in several of these trading funds closing down or liquidating positions, and that liquidation has caused some dramatic price moves totally unrelated to fundamental factors in agricultural markets. Expect more of these big price swings to continue in the months ahead.

Krueger is owner of The Money Farm, a grain marketing consulting company, and can be reached at 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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