A drought in Ukraine could be the weather shock that sparks a grain price rally, says an analyst.
AccuWeather forecasts hot and dry weather developing in Poland, the Baltic States, Belarus and Ukraine this summer with “severe impacts” on agriculture.
“We do expect drought conditions across much of Ukraine, which may damage crops,” meteorologist Tyler Roys said in a news release.
“This drought, combined with any damage to crops from the cold snaps of late spring, could yield a smaller crop and in turn lead to crop shortages and price increases across the rest of Europe.”
A recent rainfall eased current soil moisture deficits in north-central Ukraine, which had re-ceived less than 50 percent of normal rainfall over the previous 90 days, according to the U.S. Department of Agriculture’s latest Weekly Weather and Crop Bulletin.
“More rain will be needed to fully ease the impacts of this spring’s acute dryness,” stated the report.
Rainfall in other parts of the country helped maintain good to excellent prospects for the winter wheat crop and improved soil moisture for the planting of summer crops such as soybeans and sunflowers.
In a separate report, the USDA said dryness last fall delayed planting of Ukraine’s winter wheat crop, but unusually deep snow cover fully replenished subsoil moisture reserves in the spring and protected crops against frost damage.
However, if drought develops over the summer, it could quickly change the fortunes of Ukraine’s winter and summer crops, and that could be the weather woe grain markets need to ignite a rally. The winter wheat harvest begins in July and corn harvest begins in late September.
Global grain prices currently reflect ideas that there will be ample grain production this year and total supplies will be bolstered by large supplies carried in from the 2016-17 crop year.
To significantly lift prices, a serious cropping problem is needed in a major production region.
“Drought in Ukraine has a lot bigger impact on the market than does drought in the United States,” said Arlan Suderman, chief commodities economist with INTL FCStone.
“Historically, we find a much stronger correlation when there is a weather issue there than if there’s a weather issue here.”
He has no scientific explanation for why that is the case, but he has a theory. He believes U.S.-based fund managers pay more attention to headlines overseas than ones at home.
“They get tired of hearing farmers complain here in North America about the problems, and so they kind of become numb to hearing complaints and it means more when it comes from over there,” said Suderman.
Ukraine was the world’s fourth largest exporter of corn and sixth largest exporter of wheat in 2016.
It was also the third largest exporter of rapeseed-canola. Reuters reports that Ukraine’s rapeseed exports are poised to explode this year. It quotes UkrAgroConsult’s forecast of a 60 percent rise in 2017-18 to 1.65 million tonnes because of a 70 percent increase in production.
As a result, a significant drought in that country could help lift the prices of a number of key crops. Suderman said a rally would likely start with corn.
“If you combine (Ukraine’s drought) with the reduction in corn area in the United States and in Europe, then that starts to tighten things up a little bit,” he said.
World corn ending stocks are expected to be a bloated 223.9 million tonnes at the end of 2016-17, but China holds 45 percent of the supplies and the U.S. another 26 percent.
Outside of those two countries, corn stocks are fairly tight, amounting to a 42-day supply of the crop, said Suderman.
Corn and wheat prices are closely linked, so he believes there would be upward pressure on wheat prices, especially if Ukraine’s winter wheat crop sustains damage.
Australia’s wheat crop is also under threat because of El Nino, and damage from a spring blizzard that dumped 250 to 500 millimetres of snow on the U.S. winter wheat crop might be more extensive than originally reported.
“One of our people went back to the area late last week, and from the roads things look nice, but you walk in the fields and there’s a lot of problems. It’s getting worse,” said Suderman.
The big funds are heavily net short in the wheat market, meaning they hold a preponderance of short positions that pay off when the market falls. Any weather-related rally that would force the funds to scramble to cover their short positions would exaggerate the rally.