Tuesday, February 7, 2012

Markets rally on winter woes

International markets over the week continued to rally, with soybeans leading the charge (+46c) followed by wheat (+17.5c) and corn (+10.5c). The bulls have stopped focusing on Sth American weather and have moved their attention to Europe. And in particular the extreme cold in the East that is forecast to damage already drought ravaged winter wheat and rapeseed crops. The extreme temperatures in southern Russia (-32˚C), Ukraine (-21˚C) and Germany (-17˚C) have the trade attentively building in winterkill premiums. Losses will vary widely and the situation will be speculated widely until spring growth begins in a couple of months. Cold weather will also continue to exacerbate the logistics of getting grain into export channels in the Black Sea.

At the end of last week there was noise that Russians may put in place tariffs to stem the tide of high exports from the country. However the government raised the export limit to 27mmt, this is 4mmt higher then the original number first floated last October. Last years bumber grain harvest of 93.9mmt has stock so far still at comfortable conditions. Due to stocks being located further upcountry and winter logistics woes, Russian FOB offers are not as competitive as they once were and thus export pace has slowed.

The dollar continues to be in the nosebleed section, exacerbated by the Reserve Bank maintaining interest rates on Wednesday. This has the dollar at six month high against the greenback at 108c Combined with an increasingly negative basis, stifles cash prices in rallying. The bumper sorghum harvest will continues to be delayed, but higher yields will compensate for any flooded acreage. Winter wheat sowing prospects in Nth NSW and QLD is looking favourable after the rain whilst the rest of the country is having a usually dry summer.

With prices still trading at long-term highs, get set to hear near bearish daily ‘guesstimates’ of more land being put under the plough for record acreage. Also additional land (up to 7m acres) is also set to exit the US Conservation Reserve Program this year, after laying fallow for some years. The USDA has pegged total grain production this year in Canada at 50.3mmt (+8% from 2011). This rests largely on ‘hopes’ of more favourable planting conditions after the previous two wet springs. Warm conditions continue to persist across the Prairies; last week temps were 9˚C above average.

Indian government has pegged this year’s wheat harvest at a 88.3 mmt record (+2.8% from last year). However burgeoning the middle class is eating into any rise in production, with consumption also on the rise at 84.7mmt, +13mmt over the last couple of years.

After earlier extreme dry weather in January, Argentina weather has turned favourable. Although it may be too late to enhance yields in corn, soybeans will react favourable. Ministry of Agriculture has estimated that 64% of the crop is good - excellent (+8% from last week). A mix of rain and sunshine is expected through the next two weeks and most locations should receive enough rain to support crop development.  Rain will be nearly widespread in the heart of corn and soybean country today into Thursday. Meanwhile, scattered, light rains are likely to delay harvest efforts in some central and northern production areas of Brazil again this week.

The bullish momentum from both corn corn pit originated from thoughts that an increase in US exports business is expected as traditional Black Sea countries (and potentially Sth America and Argentina??) will start to restrict exports. But recent strong sales may take a hit soon with new crop South American beans hitting the market over the next couple of months. Ethanol margins in the US are also creeping lower, which may cut into forecast demand.  The domestic ethanol industry accounts for 40% of the entire US corn crop (313.8mmt).

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