Signs Point to Volatility into ’13 Season
By Mike Krueger
Agricultural markets are now locked in a battle between extremely tight old-crop supplies of feed grains and oilseeds and the potential for bearish new-crop markets if 2013 world crop production returns to more-normal levels.
Wheat is trapped in the middle, with U.S. wheat now the cheapest in the world and nearly the cheapest feed grain in the world. More wheat will be fed over the next six months than expected because it has gotten so cheap relative to corn.
Basis levels for old-crop corn and soybeans have continued to strengthen to historical highs as very strong demand for U.S. soybeans and soybean meal has lasted longer than expected. The transition from U.S. soybean supplies to South American soybean supplies has not been an easy one. Vessels are now waiting in excess of 60 days to load soybeans from Brazil. In fact, there are so many vessels waiting to load soybeans and soy products in South America that it has reportedly tightened the available vessel supply or even more export business would be coming from the U.S.
Therein lies the dilemma of old-crop soybeans and other oilseeds. China’s demand continues to be unabated regardless of the price. Argentina and Brazil are or will be harvesting big crops, but logistical snarls and slow farmer selling have resulted in massive delays in shipping those big crops to the world market.
The U.S. soybean supply will be just fumes by midsummer. USDA has refused to increase the export forecast for soybeans despite the fact that we have sold more than 95% of the annual export goal just seven months into the marketing year. In addition, actual export loading has been huge. Most of what has been purchased has also been quickly shipped. The demand for soybean meal has meant that U.S. crushing plants have also been operating at a high capacity. Both the crush and export forecast should be raised in the months ahead, but there is little supply cushion to allow for these increases.
Old-crop oilseed values have returned to the upper end of their trading range, while new-crop values have weakened on expectations of more planted acres, a record 2013 soybean yield (according to USDA’s recent outlook conference), and a steep increase in ending supplies in the 2013/14 marketing year.
The corn (and other feed grains) market is in an even tighter position. Like oilseeds, the old-crop tightness is expected to eventually give way to a huge increase in ending supplies in the next marketing year if nearrecord corn yields are achieved in 2013.
All of this continues to point to very volatile markets with big price swings as we head into the spring planting season and then the growing season. Here are some of the key market issues in the months ahead:
• USDA releases its quarterly stocks report on March 29, reflecting stocks on hand as of March 1. Corn and soybean stocks estimates will be critical to old-crop prices.
• The USDA will release the planting intentions estimate on the same day as the quarterly stocks numbers. The market is leaning toward more oilseeds acres and steady or a slight decline in corn acres.
• A wet, cool spring could mean some planting delays. The market needs early harvested soybeans and corn this year because of the lack of old-crop supplies.
• Most of the western Corn Belt and Southern Plains remains in a very severe drought. Late-winter precip was much better than the previous six months, but subsoil moisture levels have not been recharged.
• The USDA (and most other analytical groups) is using very optimistic 2013 yield estimates despite the poor soil moisture conditions today. This means markets will be even more sensitive to any threats to yields throughout the growing season. Neither the U.S. nor the world has any supply cushion heading into the Northern Hemisphere growing season.
The initial (and minimum) crop insurance prices for oil and confection sunflower were established during the month of February. The oil price is $26.60/cwt and the confection price is $33/cwt. This does offer some level of price protection if yields are very good and prices weaken.
Producers have not made many new-crop sales of any crop, according to grain buyers across all of the U.S., relative to the past three years. Drought, plus the fact that selling early in recent years has been at low prices, are the reasons producers haven’t been active new-crop sellers.
There is no reason to carry any old-crop supplies into the new crop with price inverses very large. Producers should also consider making new-crop sales on any significant price rallies and look for option strategies to protect against a summer rally if weather turns threatening.
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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