Thursday, June 21, 2012

Prices at the mercy of the weather

Risk appetite is back (for short term anyway), with the Australian dollar jumping above 101c for the fist time since in five week on the weekend’s Greek election result. Combined with variable weekend rainfall across the US and subsequent poor crop conditions has given the futures market a kick after last week uncertainty and subsequent strong sell off.

ABARES has forecast this year’s wheat crop at 24.1mmt, -2mmt from their last forecast. Although the cut supported the market, however  judging by current conditions it is expected. Whilst stocks stored in the country bulk handling system (BHC), has had one of the biggest declines with a whisker under 3mmt disappearance from April to May to 16mmt. NSW registered the biggest monthly decline of 931kt. Total grain stored in each state is WA 41%, NSW 28%, SA 14%, Vic 13% and QLD 4%. Exports at the tail end of the marketing year (Oct – Sept) may face increasing pressure from the Northern Hemisphere, particular from cheaper Black Sea origin. 

Welcome rain this week across SA (20 – 30mm), Wimmera (20 – 30mm), whilst the Mallee (5 -10mm) and SW NSW barely wet the ground, with these regions in desperate need of a drink. NSW has had yearly rainfall totals in most regions ranging anywhere between 90mm (Nyngan) to 200mm (Forbes) above average. However, especially in the south and southwest of the state, the taps have been turned off over the last couple of months, drying out available topsoil moisture. Tocumwal for example has received only 37mm since April, a deficient of 80mm compared to the long term average.

The latest BoM forecast (July – Sept) doesn’t offer much confidence, with the chance of receiving above median rainfall at 30 – 40% over WA, SE SA, Wimmera, Darling Downs and Nth NSW. Whilst the rest of the cropping regions is about equal.

Internationally, US winter harvest continues to have a dream run, with an estimated 48% in the bin. Further north spring wheat conditions continue to be ideal with 83% rated good/excellent. Conditions are still sweltering in Russian lower Volga region and Kazakhstan and northern Chinese plains with temps hitting 39˚C. Some regions have experienced four to five days of hot weather, rapidly speeding up maturing of winter crops and sapping yields for spring wheat. Leading Russki grain analyst SovEcon, has cut wheat output by nearly 6% to 50mmt (-6mmt in 11/12), further cuts you would assume would be a given, due to spring dryness.

Western Europe continues to be very wet, interesting to see how quality/yields will go when harvest kicks off. Chinese production/stocks continues to be a guessing game, but a strong downward bias from the latest USDA estimated of 120mmt is likely. Combined with a further >2mmt cut for Australia and more severe cuts to Russian/Kazakh output. Ending stocks will continue to be whittled down, but will remain at comfortable levels. 

Although some heavy rain has fallen over the US Midwest recently, it was highly variable (concentrated in the west) and some was just a little too light to have a huge impact.  The direst areas in eastern regions didn't get a drink, with temps also warming up (35 – 40˚C).  Many regions (especially in the eastern corn belt) will face irreversible yield damage as the key pollination period draws closer.

Recent soil moisture levels were 60% "abnormally dry" or "drought" for the Midwest, 73% of the High Plains and 74% of the South. Corn moisture needs are rising at the very same time that ground moisture is declining. Most corn is already in the rapid growth phase, due to early sowing. This is placing a tremendous demand on the soil for water. Looking back at the latest CFTC report, funds are long just 89k corn contracts (11mmt), while they were sitting at a near record of 458k longs (58mmt) a year ago! Look out for funds ability to come in and be aggressive in buying corn (go long), shifting the grain market sharply higher.

Soybeans have now surged 5% over the last two days on the back of the latest weather induced rally. Crop conditions continue to deteriorate crops in some key states rated 29% very poor/poor. Although winter wheat harvest is making quick inroads into the Midwest, dry soil conditions may sway some growers to fallow over the summer at the expense of double-cropped beans. Combined with an extremely tight US stocks scenario (tightest in 47 years!), the oilseed complex will remain a powder keg throughout 2012.

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