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World Oilseed Markets Continue to Tighten

Wednesday, December 1, 2010
filed under: Marketing/Risk Management

By Mike Krueger

The world oilseed situation has continued to tighten over the past two months, for two primary reasons. The more significant of those reasons is that the October and November USDA crop production reports have reduced the U.S. soybean yield and reduced forecast ending supplies. The second reason is that China continues to buy soybeans at an unprecedented pace. Here’s what has happened:

1. USDA reduced the soybean yield, production and ending supply estimates in the October report. The result was a 75-million-bushel reduction in ending supplies.

The November USDA report again reduced the yield estimate, increased demand and reduced ending supplies by another 80 million bushels. Now, instead of forecasts three months ago for U.S. soybean ending supplies to push as high as 400 million bushels, the latest estimate is down to 185 million bushels.

Several analysts believe USDA’s soybean demand estimate is still too low and that ending supplies will eventually drop again. This will create an extremely tight ending supply outlook.

2. China has continued a very aggressive soybean buying pace for several months, with soybean sales announced to China almost daily. U.S. soybean export sales already total more than 60% of the expected total for this marketing year, and the year runs until the end of August 2011. Total soybean imports by China are now estimated to total 57 million metric tons. That compares to 50 million last year and just 41 million the previous year.

China also has been a significant buyer of world vegetable oils. Soybean processing margins are reportedly extremely profitable. That implies there’s little reason for China’s appetite for soybeans to weaken.

These events have pushed soybean futures above $13 and soybean oil futures above 54 cents/lb. These are very sharp gains since the last edition of this magazine. Oil sunflower prices also have continued to go higher and are now above $21/cwt, while canola is above $24/cwt. New-crop (2011) contract prices have also gotten very strong.

The reductions in both U.S. soybean production and ending supplies, coupled with China’s demand, will put increasing pressure on this winter’s soybean crops in Brazil and Argentina because there isn’t much “comfort” level left in the world’s oilseeds balance sheets.

Oilseeds aren’t the only market that continues to get bullish news. The November USDA report also reduced the U.S. corn yield (again) and cut corn ending supplies. Like soybeans, analysts believe the corn yield will drop again in the January “final” yield report and that ending supplies will be smaller than the November estimate. China could also play a role in corn if that nation’s imports are greater than expected. Corn prices in China remain at record high levels despite a big crop and the sale of strategic reserves. That has some China watchers saying China’s corn reserves are not as large as reflected by China’s government or by USDA.

The latest reductions in oilseed, feed grain and wheat ending supplies, both in the U.S. and globally, will have an impact on new-crop as well as old-crop price direction. There has been little question that corn would need to find four to six million more acres in 2011 to satisfy demand and rebuild ending supplies. The latest changes in the soybean supply now mean that soybeans will also need to find more acres in 2011.

It is very dry across key parts of the U.S. winter wheat region, and condition ratings have been very low. That might spell lower winter wheat yields and thus the need for more spring wheat acres.

You must also throw other macro factors into the mix. Gold has traded above $1,400/oz. Cotton has been on a super rally to new highs. Crude oil was pushing toward $90 a barrel. Financial markets have been strong and the dollar has been weak. The word “inflation” is starting to surface.

It will be a very interesting marketing winter indeed.

Mike Krueger is owner of The Money Farm, a grain marketing consulting firm. 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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