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No Letup in Market Volatility

Thursday, January 1, 2009
filed under: Marketing/Risk Management

By Mike Krueger

In the December issue, I wrote about how world macro economic forces have led to a massive deleveraging and liquidation in virtually every market — from crude oil to soybeans. It would have been incomprehensible back in July, when crude oil was trading at $140 to $150 a barrel, to envision it going below $40 by mid-December; but that’s exactly what has happened.

By now all of this is old news. The pain of 50% (or greater) declines in commodity prices has affected everyone in agriculture. We don’t seem to be very much closer to solving the world’s economic problems today than when my last article was written, despite massive infusions of money (bailouts) and interest rates that have now declined to almost zero. Yes— they are actually almost giving money away. The problem still remains that no one is willing to take the money — even at zero interest.

We also, of course, are soon to have a new administration in place that has promised to do whatever it takes to boost economic activity. That translates into spending even more money.

Although commodity prices have seen precipitous declines, the volatility that has been with us for well over a year is still with us today. Markets the first two weeks of December offered a classic illustration. March soybean futures closed at $8.91 on Friday, November 28. They closed the following Friday (December 5) at $7.87, and then the next Friday (December 12) were back up at $8.56. And December is supposed to be a quiet month in the markets.

USDA’s December report did not alter the soybean ending supply number. It did reduce the crush, but offset that by increasing the export forecast. Reduced crush also means a reduction in soy oil production.

The important USDA reports will be in January when we get the final corn, soybean and sunflower production estimates and the quarterly stocks numbers. I still think the U.S. soybean yield will be reduced and ending supplies correspondingly reduced. The pace of U.S. soybean exports continues to run well ahead of expectations. China continues to be the primary buyer. The sharp drop in soybean prices, coupled with ridiculously cheap ocean freight, has apparently created a buying opportunity the Chinese find too good to resist.

The markets are still closely following the value of the U.S. dollar and the energy complex. My opinion is that eventually the dollar will weaken further and the energy prices will start to firm. That should mean commodity prices will rally. The question, as always, is timing. No one can answer that question today.

The world’s sunflower crop, especially in eastern Europe and the Black Sea regions, was very good. World production was up more than 20% from 2007.

World oil sunflower export values are very weak. This is one of those periods of time when it is a good thing that U.S. sunflower producers do not have to rely on an export market. As weak as prices have gotten, supplying the domestic oil industry is still a better deal.

We’ve also started to see new-crop oil sunflower bids. Contracts are structured much like last year, with an Act of God clause and two delivery periods (harvest and deferred). Prices range from $14 to $16 (plus oil premiums), depending on the delivery time. The contract prices will, of course, change daily with other markets.

There has been one other notable change in the last 30 days as of this writing: fertilizer prices have finally collapsed (with everything else). The sharp price break is the result of a number of factors, including the late and wet harvest that prevented fall application across a very wide area. Farmer resistance to the high prices also reduced demand. The fertilizer market is in real turmoil. The price cuts will at least make crop budget worksheets for 2009 look a little better with reduced input costs.

Markets in general are still heavily dependent on outside forces well beyond our ability to control or predict. The world is searching for some semblance of stability or signals that no additional bearish economic surprises will surface. World crop supply and demand numbers will continue to be tight as we enter 2009. The world will need very good crops in 2009 — even with reduced demand — to maintain even a moderate level of ending supplies.
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