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Markets Likely Extremely Volatile Through Winter

Thursday, November 1, 2012
filed under: Marketing/Risk Management

By Mike Krueger

USDA’s October 11 crop production and supply and demand revisions contained both bullish and bearish surprises. The bullish surprises were that U.S. corn and wheat ending supplies were reduced from the September estimate. The bearish surprise was that USDA increased the soybean yield and production estimate more than expected. Nearly every bushel of the increased crop production was offset by increased demand forecasts, but the larger crop left the market afraid the crop might get bigger again in the November USDA report. Markets were sharply higher the day the October reports were released, but collapsed the next day on broad-based selling led by fund liquidation.

USDA’s initial 2012 sunflower production estimate (oil and nonoil combined) came in at 2.46 billion pounds, up 21% from last year. Harvested sunflower acres for 2012 were projected to be up by 24%.

North Dakota and the Northern Plains led the nation with much better row-crop yields than expected prior to harvest. This was a significant (and welcome) surprise and left producers wondering how the yields could have been so good on the very limited summer rainfall. The difference between this region and the rest of the Corn Belt was likely because the Northern Plains did not get as hot as the southern half of the country and had greater subsoil moisture available.

The USDA October supply and demand estimates left U.S. and world ending supplies at or near the smallest ever. U.S. and world wheat ending supplies also declined on smaller-than-expected wheat production in Russia, the Ukraine and Australia. Wheat supplies are the second tightest, with the tightest being back in the spring of 2008.

The larger-than-expected increase in soybean production, coupled with a generally good weather outlook across Brazil and Argentina, brought fund selling to the soybean market. Large speculative funds were holding record large long positions in soybeans prior to the USDA report. They evidently decided that the report contained the last of the bullish news and started selling in large volume the day after it was released.

Soybean export sales stand at an all-time record high. Purchases by China are at a record pace for this date. The market and USDA are forecasting a record South American soybean crop, based on big acres and record yields. The crop isn’t planted yet, so record yield forecasts might be a bit premature; but that is how the markets operate these days (remember the record U.S. corn yield estimates last winter and spring?).

Any hint of weather troubles in South America will result in sharp rallies. The one important weather issue to watch is the shift from a La Nina to an El Nino pattern. La Nina is a poor weather pattern for South America, and that was the pattern last year. The shift to El Nino was starting to happen, but that shift has stalled and might actually be shifting back to La Nina.

World vegetable oil markets have also been very weak, mostly because of larger-than-expected palm oil supplies. U.S. vegetable oil supplies are declining, and that should also eventually mean higher oil prices. Canada’s canola crop was also much smaller than expected.

World and U.S. soybean supplies will remain very tight until late next spring when the 2013 South American soybean crop becomes available. Markets should remain extremely volatile through the winter, and that will present better selling opportunities than we see today.

The sunflower market will continue to track the soybean and other vegetable oil markets. U.S. soybean oil and Canadian canola oil supplies will continue to decline throughout this marketing year into early next summer.

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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