Crop price rally could lose strength as weather improves

I would be surprised if the crop price rally of April and May can continue into June.

Crop prices rallied as the market assessed the damage to soybeans in Argentina from the excessive rain in April and dry weather in Brazil’s corn growing region.

Analysts now believe the rain slashed Argentina’s soybean crop by four to eight million tonnes.

It appears global livestock feeders who buy a lot of their soy meal from Argentina were caught short. Their scramble to find alternative meal supplies drove up the nearby Chicago soy meal futures contract by more than 50 percent from April 7 to May 30.

That helped drive soybeans 18 percent higher, supported by the U.S. Department of Agriculture’s preliminary seeded area estimate, which was lower than expected.

Canola trailed higher, up less than 10 percent, limited by falling soy oil prices as competing palm oil also fell on ideas that production is recovering from El Nino drought more quickly than expected.

The soybean rally, as well as rainy weather in the last week in the Midwest that pushed corn planting beyond the recommended seeding date, should have caused American farmers to switch more acres into soybeans.

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There is a possibility that the oilseed rally could run out of steam this week. The big investment funds have moved from a net short position to a net long in soybeans, raising the potential for rounds of selling and profit taking.

We’ll soon start to receive private analysts’ updates on their assessments of U.S. seeding, which would also weigh on soybeans if there are sizable jumps in soybean area.

We’ll get a definitive look at what was seeded when the USDA releases its final acreage survey report June 30.

In canola, the risk premium to account for a dry spring in large parts of the Canadian Prairies is unwinding as moisture improves. The dry area is now mostly limited to Saskatchewan’s northern grain belt.

The U.S. dollar could also affect the crop market. Expectations are growing that the Federal Reserve will increase interest rates this summer, perhaps even at its June 14-15 meeting.

Higher interest rates would lift the U.S. dollar, which would weigh down American crop prices and perhaps stall out the crude oil price rally.

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Wheat will face pressure as the U.S. winter wheat harvest begins.

The crop is expected to have some of the best yields in years, but rain this week in Texas and Oklahoma could downgrade quality.

There is still risk pricing in the crop markets to account for the rapid switch from El Nino to an expected La Nina and the potential for dry weather in the U.S. Midwest late in the growing season.

However, the weather outlook for June in the Midwest looks like close to normal rain and a bit cool, while the Canadian Prairies could continue warm.

The three-month forecast from the U.S. Weather Service Climate Prediction Center issued May 19 for July through September show the potential for a warmer than normal growing season in the Midwest, but the moisture outlook is average rainfall. The potential for dry weather does not appear until the fall.

I think there is potential for the crop market to start becoming more comfortable and unwind some of the recent rally.

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However, that prediction would change if the news on crop tallies from South America worsens or if there is a rapid transition to hot dry weather in the U.S. Midwest in July.