Nows the time to pull the trigger on new season canola

After languishing around $600/t over the past four months, new season canola has climbed an astonishing $73/t in May, and are now touching price levels not seen since July ’08. Along with the rise in international futures, domestic prices have risen at a faster race, with basis (over the prevailing Winnipeg Nov ’11 futures) currently at A$89/t, it was -$2/t in mid March. In the eastern states basis is still historically very strong, currently at $42/t in Vic/NSw and $61 in SA.

There has been plenty of chatter about the potential loss of canola acreage in Canada attributed to the persistent wet/cold weather, but the driver of the current market during the past month has been European weather woes and subsequent surge in Matif rapeseed futures. Canadian canola for November delivery is US$70/t cheaper than EU rapeseed; two months ago this same spread was just US$20/t! This has allowed canola markets to out perform and distance them selves from the Chicago soybean markets.

If we compare our forward prices to EU rapeseed Nov ’11 futures (€481), basis would be $33/t (WA), $9/t (SA) and -$10/t (Vic/NSW). Still very high historically! So could there be any bullish news coming out form Australia that could drive domestic prices higher. Australian Oilseed Federation in there May update, estimated that WA would plant 830,000 ha (830,000/t). But given the low subsoil moisture, potential shift to a safer rotation crop after last year’s disastrous harvest and late break in the season, the real area could be around 700-750,000 ha.

With forecasts for the 11/12 EU crop being downgraded significantly in the key high yielding growing regions of Germany and Northern France (total EU forecast at 18.5 mmt), it is expected Australia will pick up the slack. With improving crush margins, an increase in demand for Australian canola will be apparent, however Australia may see some competition from the Ukraine as they have recently removed their export quotas.

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!

Drought Breaking Rains forecast for WA.....?

Dry and warmer conditions continue to persist into another week for many WA grain growers, so when will the previous sixteen months of record dry conditions come to an end? A report released by World Weather Inc, anticipates that current changes in the atmosphere will support the notion that Huey will soon be sending it down!

Warm ocean temperatures over the eastern Indian Ocean will soon contribute a steady influx of tropical moisture into Western and South Australia to help induce better rainfall potential. This pooling of warmer than usual water in the eastern Indian Ocean is part of the Indian Ocean Dipole (IOD) circulation that has a big influence over Australia. This negative phase of IOD usually helps to bring greater than usual amounts of moisture to the western and central sections of Australia so that when cool fronts move from west to east through the region they are enhanced with moisture that is then dragged into other parts of the country.

The negative phase of IOD is already beginning to evolve, but rainfall has not been falling because of a couple of other factors. First the Southern Oscillation Index (SOI) had been strongly positive for an extended period of time and this has favoured rainfall in eastern Australia and tended to downplay rain events in the west. Another reason for recent suppressed rainfall in WA has been the recent development of the negative phase of Madden Julian Oscillation (MJO).

However World Weather Inc believe that both of these features are expected to weaken and/or diminish in the next seven to ten days. As these features change and move out of the region, a wet weather bias is likely to emerge. This is in contrast to the latest SOI report released by Australian Bureau of, which predicted a weakly positive IOD to develop over the coming months.

World Weather is so certain that the drought will soon break, they have warned about potentially planting delays attributed to wet paddocks! They are so bullish they believe these changes will arrive sooner rather then later! Whilst short term rainfall forecasts show some light rains scattered across the wheat belt, wide spread soaking rains are still missing.

Domestic market factoring in continuing WA dryness.

Okay, so everyone knows that after 16 years Fremantle still isn’t respected in the football community, and that it has been dry in Western Australia over the last several months! La Nina seemed to be weakening through April (and forecast to be neutral during winter), however its effects are still lingering. While WA growers currently dry sowing the majority of their crops, there is continuing evidence that rainfall over the next three months will likely be lower then normal over WA.

The market is already adjusting a premium in WA for this prolonged dryness. Just a month ago, Kwinana 2011/12 wheat prices were at a $28/t premium over Geelong, currently this premium has increased by $10/t to $38/t. Canola which is more susceptible to autumn dryness, the premium has ballooned out more. Four weeks ago Kwinana premium was $25/t; now this has increased $17/t to $42/t.

So far in May, Merredin has hovered around 25 degrees (5 degrees above average) with only 5mm recorded since the start of March. But the question is, is it unseasonal? A quick look at past April long range forecasts actually shows that this years forecast is really no different to other years. Additionally, this year’s average summer fallow rainfall (weighted by wheat area) is in fact the highest in 4 years (with good rains in Geraldton and Esperance zones)!

Large wheat crops of the past have been produced on less fallow moisture. Clearly the critical determinant of WA’s wheat crop is in fact in crop rainfall (GSR). If an average of 300 mm is received over April-October, one can expect a crop of 9- 11mmt. 250 mm is likely to produce 8-9 mmt, but only 150 mm (like last year) will produce only 5mmt.

If only 100 mm of rain were to be received over May/ July—then these crops would have a deficit in GSR of 70-100 mm at the start of August. Over the past 30 years, the years where an average of only 100 mm has been received through May-July were : 2000, 2002, 2007 & 2010. (In 2006, only 71 mm was received). All of these are drought years. So at this early stage of the season, are the long-range weather gurus at the BOM indicating another back to back drought in WA?