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Russian Drought Implications Huge for World Market

Wednesday, September 1, 2010
filed under: Research and Development

Summer markets in this country typically revolve around weather and crop ratings. U.S. weather has been a bearish market factor this summer. Most of the Corn Belt and Northern Plains have experienced a generally excellent growing season, with normal to above-normal temperatures and precipitation. Problems have centered on too much moisture rather than too little.

Last spring, extended weather forecasts were calling for the possibility we could have a hot and dry latter half of the summer. So far, those conditions have been mostly limited to the Deep South. The result has been great crop condition ratings for basically every crop. About 75% (or so) of the corn, soybean and wheat crops have been rated good to excellent throughout the season. That has led to high yield estimates and a market attitude that was decidedly bearish through most of June.

The weather market of 2010 wasn’t in the U.S. It occurred in Russia with a major drought that didn’t show up on traders’ radar screens until mid- to late June. The severity of the drought surpassed anyone’s expectations and has caused a very sharp reduction in crop production in Russia, with smaller reductions in surrounding FSU countries.

The immediate response came in the wheat market, which rallied nearly $3.00 a bushel from the end of June to the first week of August. It was almost a single- commodity rally in that corn and soybeans did not tag along. That’s because Russia has been a large volume and cheap exporter of wheat the past two marketing years. The drought has cut their wheat crop significantly, and Russia has declared a moratorium on wheat exports.

The market has yet to talk about how the drought has also devastated Russia’s hay and forage crops. That will mean they will need to import feed grains or sharply reduce livestock herds.

This drought is a very significant fundamental occurrence for the grain and oilseed markets. As the drought persists, it has also drastically reduced yield potential for feed grain and oilseeds crop yields, including sunflower. USDA’s August 12 world supply and demand report cut Russia’s total wheat and feed grains production to just 65.9 million metric tons, down from 104.4 million last year. That is a huge change to the markets.

It is interesting that the big market response in wheat has yet to spill over into crops like sunflower, since sunflower is a major crop in Russia. Of course, there are no futures markets for sunflower, so the large speculators have no way to buy or go long on sunflower like they can in the various wheat futures markets.

The damage to the sunflower crop is also not fully known yet. Sunflower matures later and tolerates drought better than other row crops. Between 40 to 50% of Russia’s sunflower crop is produced in the areas that have been hardest hit by the drought.

My opinion is that losses will be greater than currently anticipated. Some analysts have reduced their world sunflower crop production estimates by one million metric tons (or so) because of the drought in Russia. U.S. sunflower yield prospects, on the other hand, look very, very good.

World oilseed markets have remained much stronger than expected through the summer, for reasons other than the Russian drought. The extremely wet Canadian spring planting season resulted in sharply lower canola acres than expected. Soybean demand to China simply does not stop or even slow down. The record soybean crop in South America hardly put a dent in soybean prices because of big weekly purchases of newcrop soybeans from the U.S. by China. The USDA announced soybean sales to China on seven consecutive days in early August.

The soybean outlook is still considered bearish, based on projections that U.S. ending supplies will double in the next marketing year and world soybean supplies will be record large. Oilseeds markets, however, have ignored the big supply picture and focused on the rapidly expanding demand outlook. Soybean demand should continue to outpace expectations.

The U.S. vegetable oil outlook continues to be hampered by the failure of Congress to reinstate the biodiesel tax credit that expired last December. More biodiesel production facilities close every month the credit is not available. The business is not profitable without the tax credit.

The sunflower market has been relatively steady the past few months, but has recently rallied back toward the highs of the last six months. Sunflower oil prices have strengthened considerably. The August USDA crop production and supply and demand reports increased the soybean yield to a record 44 bushels per acre, but increased demand offset the increase in production. The corn yield was also estimated to be a record 165 bushels an acre, but increased demand actually reduced ending supplies.

Demand will be the story of the 2010/11 marketing year. China continues to aggressively buy soybeans and could be a larger importer of corn than expected. The decline in Black Sea region production will push more wheat and corn demand to the U.S. The sunflower market should benefit from the strengthening demand outlook.
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