No Letup in Wild Markets
It has been an incredible couple of months in the markets. That goes for financial markets as well as commodity markets. Virtually every agricultural commodity futures market soared to new all-time highs.
The big price rallies were accompanied by increasing volatility. Daily limits on wheat futures were increased to 60 cents a bushel, and the daily limits on corn and soybeans were increased to 30 and 70 cents, respectively. Soybean oil futures also ran quickly to new all-time highs on big demand for soybeans and soybean oil to China.
The sharp run-up in soybean oil futures also brought cash prices for sunflower and canola to new highs, both in the old-crop and new-crop positions.
The agricultural markets in fact, all commodity markets have been super strong for months because of very big demand and declining supplies.
Another major factor has now been introduced into the equation that is even harder to analyze than the commodity markets: the meltdown in the U.S. financial markets. The sub-prime mortgage problems that started to surface last summer have gotten worse, not better. The March demise of Bear Stearns sent another shock wave through every market. The trouble is, no one knows just how big the mortgage-based problem is. It has prompted more recession talk. There have also been a number of hedge fund failures resulting in liquidation of positions in nearly every market.
All of this has added to the volatility of the markets. This increased volatility has meant increased margin requirements for futures transactions which, in turn, has forced many companies, including major grain companies like Cargill and ADM, to stop buying new-crop grains and oilseeds except on basis-only contracts. This is an unprecedented move, and means that producers who want make new-crop sales will have to open their own futures account and make the margin calls. The capital requirements to carry large hedged positions in these markets have become too burdensome even for the giants to maintain.
An exception is the cash new-crop contracts for both confection and oil sunflower. In these cases, end buyers are supporting those prices. Thus, new-crop contracts have not been pulled or altered in the same manner as the contracts supported by the futures market.
So the real question is, are these bull markets finished or are they just taking a well-deserved break? There are a number of significant factors that will affect prices in the weeks and months ahead:
The situation for the minor oilseeds (canola, sunflower) has been equally interesting. The rapid push to all-time highs in soybean oil futures also took prices for canola and sunflower to all-time highs, including new-crop values. New-crop confection sunflower prices jumped to in excess of $37/cwt in an effort to draw acres. These high prices occurred during the month of February when the federal crop insurance minimum price guarantees were established.
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