Wow what a week, with the commodities rally continuing to surge on the back of the scorching US weather. Since this rally kicked off on the 18 June, corn has gained +37%, wheat +26%, beans +15% and canola +12%. The market continues to look volatile, with US Crop Condition released (will it be 10% declines?) tomorrow and USDA global S&D reports on Wednesday night. Domestically, last Friday all grades hit contract highs, with APW surging $55 in three weeks. The dollar continues to erode full value, trading within a 102 – 103¢ price range this month, sharply higher then the May-June average. The East Coast and parts of northern WA are still forecast to get a soaking this week, quelling any short-term production fears. However all price action has been driven offshore, with wheat playing second fiddle to corn market.
The continued collapse in crop conditions and lingering production concerns on the back of record spell of hot/dry weather and limited rainfall for the key US growing regions has been the driver of the current market. The saying ‘don’t count your chickens’ rings true for the US corn complex. With the biggest acreage planted since the 1940’s, combined with biggest yield dialed in ever (166 bushel acre), for some reason the trade thought the weather gods would play ball and a bin busting crop would be a given, dragging world prices with it. However the perfect growing season is rare, and with such a huge yield forecast, the fall was bound to be harder and sharper.
This is a yield-sensitive period, up to 5mm of moisture is needed daily, for ideal kernel development. And although there has been constant rain in northern growing regions, the majority of the area hasn’t had a good drink for months. There are already reports of many growers making the decision to cut their losses and start bailing corn/mowing for silage. On an average year around 8-9% of the total planted area is cut, so expect this to sharply increase this year.
Although no major rain is forecast to hit key regions this week. A wetter bias is likely in southern Delta growing regions, with humid moisture coming up from the Gulf of Mexico. This changing weather pattern may open the door for more erratic wet weather for second half of July. However for many reasons it could be too late, some bean crops however could still be salvaged.
With the spotlight on the US corn, heat is coming back into Russia, Ukraine and Kazakhstan. With the spring wheat in these regions really hasn’t had a soaking rain for months. Forecasters will be soon falling over themselves in calling this crop lower. Russki domestic and export cash wheat has surged this week in the wake of an expected lower production forecast. Last marketing year both Ukraine (21.8mmt) and Russia (27.8mmt) had bumber export programs, paying the way for low grain prices. However for 12/13, expect these numbers to be severely reduced (apart from corn), after winterkill and ongoing dryness cuts yield potential for both winter and spring crops.
Whilst in Western Europe, conditions continue to be too wet; we may start to hear quality concerns being mooted. Argentina once one of the traditional wheat exporting powers, continues to reduce wheat acreage in favour of more profitable corn/beans. Planted area is estimated at -20% from last year at 3.7m ha, a far cry from earlier last decade when are hovered at 7m ha. Sowing is estimated at 64%.
Although the long-term wheat fundamentals looks bullish, the IGC recently cut new crop global wheat supplies to a five year low of 665mmt (a 30mmt decline from 2011/12) and expect more cuts to follow. But be cautious of some short term price set backs, I think the Fin Review had two articles devoted to the recent rally on Friday alone. So imagine the ‘main street’ press in the US! So could be a bumpy ride, juggling the flow of speculative money with the true fundamentals. But with wheat nudging $300, and in some parts of Australia looking cheery ripe, it is a hard number to ignore to engage the forward market.