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New Themes Add to Oilseed Market Strength

Tuesday, January 4, 2011
filed under: Marketing/Risk Management

By Mike Krueger

Oilseed markets in general have continued to be very strong, led by the same themes that have been present for the past several months. Those themes include:

• Strong economic growth in China and all of Asia.

• Very strong soybean and soybean oil export sales pace, with China still leading the way.

• More tightening in the U.S. soybean ending supply outlook, with the USDA again cutting ending supplies in the December report.

• Strong fundamentals in corn and feed grains markets.

• Improving (more bullish) fundamentals in the wheat market.

There are two recent additions to the list of bullish themes. The first is that the U.S. Congress has passed and the President has signed legislation that extends the ethanol blender’s credit and reinstates the biodiesel tax credit. This will mean ethanol production will be larger than recent USDA forecasts and that the U.S. biodiesel industry should start to ramp up production. That will mean more vegetable oil consumption.

The second new theme is that weather in Argentina is still hot and dry. This is typically the case in a strong La Niña weather pattern. As much as a third of Argentina’s soybeans had not been planted as of mid-December. This is very late, and yields on late-planted soybeans are usually below average. It also appears this hot and dry weather is impacting corn pollination. Some analysts are already trimming their production estimates for corn and soybean production in Argentina.

The smaller-than-expected ending supply estimates for corn, soybeans and wheat have already triggered more talk about the need for increases in planted acres for virtually every crop in 2011 in order to bring ending supplies back to reasonable comfortable levels.

The trick will be where those “extra” acres come from and what crops capture those acres. Initial acreage estimates by private forecasters have not shown increases large enough to rebuild ending supplies — even with average or higher yields. It appears we will need to plant at least 10 million more acres of crops in the U.S. than last year to accomplish this task. The obvious question is, where will we find that many acres?

Markets will continue to focus on weather in Brazil and Argentina and demand from China. Argentina is off to a shaky start because of dry conditions. Most of Brazil is off to at least an average start to their growing season. It is still early in the Southern Hemisphere soybean growing season. January and February are the key months for soybean development.

Markets also can’t ignore the macro issues that continue to impact related markets like currencies and energy markets. The European debt crisis continues to push the U.S. dollar higher, and that can be bearish for commodity prices in general. The CRB Index, a measure of commodity prices in general, reached new highs for this move just before Christmas. There also continues to be much speculation that “new” investment dollars will again be flowing into commodities in 2011.

Perhaps the single most potentially bearish factor in markets is the uncertainty in world economies. A sharp break in the economic outlook would have a negative impact on prices. There is no question, however, that world supplies are declining and weather is troublesome in some key production regions.

The rally in prices does not appear to be over. The strength in soybeans and soybean oil continues to pull sunflower prices higher as well. The scramble for acres in 2011 should also support strong sunflower markets heading toward spring.

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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