Crop prices rally on drought concerns

Dry weather in Argentina and in the southern U.S. Plains has turned up the heat in the grain market, and prices through February bubbled higher.

The Argentina situation has the more immediate impact because the soybean and corn crops there are in yield setting mode and are advancing toward harvest, while the U.S. winter wheat crop is not yet out of winter dormancy.

The February U.S. Department of Agriculture report issued on Feb. 8 pegged Argentina’s crop at 54 million tonnes, but most local  and private forecasts now put the number at 46 to 48 million, and on March 2 the Buenos Aires Grain Exchange slashed its estimate to only 44 million. Last year it produced 57.8 million tonnes, so this year’s production could be down 13.8 million tonnes.

The trouble in Argentina has supported soy meal the most. From Feb. 1 to March 1 the May Chicago soy meal contract rallied about 16 percent, while soybeans climbed almost seven percent. However, soy oil fell about two percent.

A wild card in the oilseed market is the U.S. President Donald Trump administration’s decision to impose tariffs on steel and aluminium. Trump’s sabre rattling on trade already has China studying restrictions in U.S. sorghum, and if it were to restrict American soybeans, it would immediately kill off this soy rally.

Let’s hope agricultural trade is not affected.

The market’s price reaction to the Argentina situation has greatly improved the profitability of American soy crushers, increasing their activity and adding to the support for seed prices.

However, soy oil prices are lagging on ample supply and a lack of strong price direction from rival palm oil or crude petroleum oil. Also, the global supply-demand ratio is much tighter for meal than for vegetable oil.

Nevertheless, May canola rallied 5.4 percent in the same period, even without any help from soy oil and with concerns about increased acreage this spring.

The crush margin for canola has improved.

However, price gains for the seed have been limited by the severe problems in rail shipping in Western Canada in the last few weeks. That has slowed exports. Canola exports are now behind last year’s pace after being ahead for most of the crop year.

If the situation does not improve soon, the forecast for year-end stocks of the oilseed will have to increase, and that will be negative for prices.

As for the rally in Kansas winter wheat, the May contract price March 1 soared well above US$5, a rare situation over the past three years.

Minneapolis spring wheat also rose, but the rally has been less dramatic given its already strong premium over the Kansas contract.

The 10-day forecast issued March 2 held little hope for rain in Kansas, Oklahoma and Texas.

The rubber will really hit the road in another week or two when temperatures rise and the wheat comes out of dormancy. If there is still no soil moisture when the plants start to grow, then worries about yield damage could become reality.

The U.S. winter wheat crop is incredibly resilient and April rain could still save it.

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