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Bull Market Continues Being Fed

Monday, March 28, 2011
filed under: Marketing/Risk Management

By Mike Krueger

We continue to witness the most volatile markets in history. The most recent market activity has been massive liquidation of long positions in wheat, corn and soybeans by the speculative trading funds. This latest round of fund liquidation has resulted in significant price drops.

The unrest in North Africa and the Middle East pushed crude oil prices to well above $100 a barrel. That rise in energy prices prompted fears of a world economic slowdown that could hurt demand for agricultural commodities.

The second blow to market confidence was the enormous earthquake and tsunami in Japan. Japan is a major importer of corn, wheat, soybeans and soybean meal from the U.S. Damage to its infrastructure could result in smaller demand than expected.

The March USDA supply and demand report made no changes to the corn and soybean outlook. Ending supplies were left exactly unchanged and are extremely tight. The USDA did reduce the wheat export forecast by 25 million bushels and increased ending supplies accordingly. We have sold plenty of wheat, but it might not all get shipped by the end of the wheat marketing year on May 31. Those sales will not go away; they will be rolled into the next marketing year.

The South American soybean crop is going to be very large. Estimates for Brazil’s crop are above 70 million metric tons. That is an all-time record. The problem in Brazil is that it won’t stop raining in the central and northern parts of the country, and that has slowed the harvest progress and is now affecting quality. Some analysts have started to reduce their production estimates. Weather in Argentina has improved and stabilized the soybean crop.

China is still the biggest demand factor in the oilseeds markets. The focus of their soybean imports has shifted to South America, but weather delays in Brazil could still push more export business to the U.S. The U.S. soybean situation is still very tight. There is some disagreement among analysts over whether soybean demand is overstated or understated. Export demand is likely understated, and that should mean ending supplies get even smaller.

The market’s attention will now focus on the March 31 USDA stocks and planting intentions reports. Corn must find an additional four to six million acres, and soybeans really need to find at least a million more to make supplies more “comfortable.” Cotton’s record-high prices will attract at least a two-million-acre increase from 2010. We already know that winter wheat acres are three million-plus more than a year ago.

All of this means U.S. farmers must somehow plant eight to 10 million more acres than a year ago — and the most in well over a decade. That will be very hard to accomplish; and even if the gains are attained, we will still need above-average yields to have any hope of building stocks. Weather will play a very critical role in 2011.

The sunflower market, both oil and confection, has not collapsed to the extent that soybeans and soybean oil have. New-crop prices remain very strong in an effort to hold acreage at least steady in the face of increased acreage demand by every other crop.

Spring planting season weather will be critical to how many acres get planted and what crops they get planted to. The markets are very fragile. World supplies of most grains and oilseeds are tight and demand is strong despite rising energy prices and natural disasters. All this is a strong indication that the bull market is not yet finished.

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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