Tuesday, May 24, 2011

So what is driving the market..?

Volatility has many meanings, but in grain futures it can be summed up as a combined 336 cent bushel move over a seventeen day period! And after that period that particular CME wheat future contract price remained relatively unchanged..! It is refreshing to see pure agricultural fundamentals drive the market, rather then hearing how outside macros like gold, oil and even silver being attributed to price moves.

It is starting to sound like a broken record, but wet conditions are persisting in parts of the Canadian prairies and key spring wheat regions of the Northern US plains and Eastern corn belt. A US weather attaché has forecast that June will continue this wet/cool weather bias in the northern US states, while more of the same for the southern US Plains. The forecast calls for above normal temps and below-normal precipitation for Texas and the western half of Oklahoma, while above normal precipitation and below-normal temps are expected in the northern Plains. Not good news for a sowing program that is already running behind schedule, and a HRW crop that has finished heading and nearing harvest.

Canadian Wheat Board last week estimated only 3% of Western Canadian prairies have been planted (to the six major crops) compared to 52% in a ‘normal’ year. With further heavy rain over the weekend in southern Saskatchewan and Manitoba, this has further delayed sowing prospects further. Similar conditions persist in the US Northern Plains and Eastern Corn Belt, with Spring wheat plantings at 54% complete (5 year average 89%). Can high protein wheat afford another hiccup, after crops were downgraded in Canada and Australia.

This wet cool weather is especially a concern for the already tight corn balance sheet, with sowing considerably delayed in the Dakotas (8 million acres), Wisconsin (4 ma) and Ohio (3.7 ma). Ohio for instance has only planted 11% of the their corn, compared to 80% in a normal year. Remember in the March USDA intended planting report, these regions were attributed to a huge increase in acreage (The Dakota alone was planning on increasing acreage by a combined 34%!). If cool and wet weather bias continues to persist, expect a large shift to short growing season crop varieties. Can the corn balance sheet afford this loss of intended acreage especially with the ideal planting window slipping in these major states and potential loss of acreage due to flooding in US southern delta regions?

It appears that more than the average amount of the US corn acreage will be planted after the optimum date for maximum yield potential. So why is the late corn plantings such as issue..? With a shorter ‘enforced’ growing season, insect/disease pressures, moisture stress during pollination (July/Aug) all combines for the corn crop to lose about one bushel/acre/day in yields after about May 1, and that number doubles once you reach the end of the month.

Across the pond, Western Europe is experiencing one of their driest and warmest springs on record, with a French minister declaring that the country is in a “state of crisis” (mind you yields are still forecast at 7.25t/ha!). Output has been slashed and conditions are deteriorating in the top producing countries of France, Germany, UK and Poland, the earlier maturing rapeseed crops is particular taking a hit. Early estimates are that French wheat yields will be cut by 12% (32mmt), whilst German rapeseed by 23% (4.5mmt).

So looking forward, grain futures are starting to factor in potential production issues on both sides of the Atlantic (and don’t forget the US HRW crop where harvest has commenced and is rated 44% poor to very poor, and has about as much chance of improvement as the Western Bulldogs!). Speculation about the magnitude of planted and harvested acreage will continue until June 30 when the USDA releases the Acreage report, as seems to happen in this type of market some of the early estimates of lost acreage may appear to be over stated!

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