Price Volatility Continues
Thursday, November 1, 2007
filed under: Marketing/Risk Management
By Mike Krueger
There is still no end to the volatility in all of the commodity markets. Crude oil pushed to new record highs in October. Gold prices pushed to their highest level in 28 years. Soybean futures markets traded over $10 a bushel. Soybean oil prices traded above 40 cents a pound. Wheat futures traded well above $9.00 a bushel. Only corn futures remained well below their early summer highs.
The October USDA reports confirmed a record large corn crop, although not quite as big as many analysts were forecasting. The soybean crop was slightly smaller than expected because the harvested acres number was reduced by 400,000 acres.
The USDA also released its first estimate of the U.S. sunflower crop, although this first estimate does not separate oil and nonoils. Total (all types) production came in at almost 2.9 billion pounds. That compares to 2.143 billion pounds last year. Total harvested acres are projected to be 1.970 million, compared to 1.770 million last year. The yield forecast was, of course, also excellent at 1,468 pounds per acre, up from 1,211 a year ago. We can assume that roughly 20% of these totals are confection types and 80% oil. So the U.S. sunflower crop is very good, if only we had more planted acres.
The world’s sunflower crop is not nearly as good as the U.S. crop. As I reported in the August/September issue, the world sunflower crop mirrored the world wheat crop. Argentina, Eastern Europe, Russia and the Ukraine all experienced weather-related yield losses. The world sunflower crop is now projected to decline nearly three million metric tons (about 10%) from last year.
Like most other agricultural commodities this year, sunflower prices have reached historical highs. Smaller-than- expected crops, coupled with very strong demand, should keep sunflower (and other oilseeds as well) prices high through at least next spring. Another potential factor in the price equation is the possibility that some traditional sunflower-exporting countries might impose export taxes or export restrictions on sunflower. This has happened with a number of other commodities already this year as some countries are trying to control their domestic food price inflation.
World vegetable oil demand is also expanding rapidly. Biodiesel demand grabs most of the headlines, but strong world economic growth has also increased demand for vegetable oil in diets. The world stocks-to-use ratio for vegetable oils will shrink to below 10% this marketing year. And if you haven’t looked lately, crude oil prices are heading towards $90 a barrel. That should keep demand for biodiesel strong.
Soybeans and soybean oil will continue to be the primary driving force, and there is plenty of bullish news around the soy complex. The U.S. soybean crop will be relatively small because of the steep decline in soybean acreage. The nation’s soybean ending supplies are now projected to decline from 573 million bushels at the end of the last marketing year to 215 million bushels at the end of this marketing year. That is essentially “bin bottom” supplies.
China’s soybean crop was also smaller than expected, which could mean increased soybean imports. Argentina’s crops are generally off to a very good start, but there are some troubles in Brazil where it has been warm and dry early in the growing season. Soybean futures are above $10 a bushel and soybean oil futures are above 40 cents a pound. Oil sunflower prices are $18 (without the oil premium). Prices for the 2008 crops are almost as high.
There are more factors at work in these markets than ever before. Price volatility is still extremely high, even though the 2007 growing season is now behind us. Supplies of world agricultural commodities, with the exception of corn, will decline again this marketing year.
The questions being asked most often are, “How high can prices go?” and “How long will they stay high?”
No one can answer these questions. Perhaps a better question would be, “Why shouldn’t we sell both 2007 and 2008 sunflower and soybeans at current prices — and lock up the best returns per acre in at least a decade (and maybe ever?) on at least a portion of production?”