Wednesday, February 16, 2011

Has the market priced in weather risk for the first half of 2011

Australia has just experienced one of the strongest La Nina events on record. With the last comparable strong La Nina from 1973 to 1975 brought similar calamity, including the record Brisbane floods, cyclone Tracy and flood waters nearly reaching our property at the end of the Wimmera river for the first time in a centaury!

Whilst La Nina brings wetter conditions to eastern Australia it is the opposite effect across the Pacific. With warmer temperatures fast approaching, the northern hemisphere winter wheat crops will be coming out of dormancy over the next month, and so far conditions in the US and China are poor. China for example has got 5.16 million hectares out of 14 million of winter wheat in threat and this level is creeping up daily. Although dry winters are the norm, it seems this winter is a record dry. Across the Pacific the US winter drought is now encroaching on the eastern corn belt, and in Texas extremes temperature swings of 45˚C over a week (yes that is correct 45˚C temperature swing!); this isn’t ideal conditions to be growing wheat!

Over the border, Canada could be in for a case of déjà vu, with early reports that 2011 could mirror 2010 in being an extremely wet spring. Profarmer Canada is reporting that much of Manitoba and eastern Saskatchewan soil moisture conditions are already at peak holding levels. Critical areas are along the Red River Valley, which flows through key spring wheat states of Manitoba, Minnesota and Nth Dakota. With snow conditions very high, the spring thaw will be critical, with any late season storms (snow or rain) will be detrimental for sowing. If sowing is delayed maybe more acreage will be switched to shorter season crops like oats and barley however return on acreage isn’t nowhere near as enticing.

Although predicting the weather is as precarious as predicting the futures market, it seems unstable weather conditions and price volatility will prevail into 2011.

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