With the welcome recent rain in much of the Prairies, the immediate threat of a drought disaster in large areas has been put to rest.
Later on I’ll update the currency market, but first we must note the wet weather here might be the first sign of a major reversal in trends that have to this point seen drought in much of the Canadian Prairies and record-breaking excess rain in much of the American Midwest.
New long-term forecasts issued late last week show the likelihood of more normal summer rainfall across the Prairies and a shift, at least for a while, to drier, warmer weather for the Midwest.
To this point the excess rain in that region has sparked memories of 1993 and 1995 when the adage “rain makes grain” rang hollow.
In 1993, U.S. corn production fell to 6.34 billion bushels and the average yield was 101 bushels an acre. Compared to the average of the previous four years, the yield was down 15 percent and total production was down 22 percent because of the combination of lower yield and reduced acreage.
Chad Hart, agricultural economist with Iowa State University, raised eyebrows last week in the June Iowa Farm Outlook when he compared current slow planting with experience of similar conditions in 1982, 1993 and 1995.
His calculations suggested that yields this year could be down 21 percent from the trend line of 173 bu. per acre. A 21 percent cut would take it down to only 135 bu. per acre, which would be a disaster that would lead to much higher prices to ration demand.
But Hart stressed he is not predicting such a low yield, noting that there is a lot of weather between now and harvest that could drastically affect final yields.
And the forecast in the middle of last week for drier, warmer weather into early July following a wet weekend limited the market’s enthusiasm for another leg up in the rally.
But on June 20, the U.S. National Weather Service Climate Prediction Center issued a new forecast for the month of July showing continued below normal temperatures and above normal rain for the Midwest.
That is not what American farmers want. They need an increase in growing degree days to advance the much-delayed crop maturity to avoid damage from September frosts.
Huge question marks remain over the American corn and soybean crops but true panic has yet to overwhelm the market. What will be the final spark? A regular drip, drip of poor crop condition ratings? An early frost? It is impossible to tell.
I should add that the bad weather in the Midwest extends up into southern Ontario’s corn and soybean region. Planting is also way behind and crop conditions are poor.
The Weather Network forecasts temperature swings in southern Ontario this summer leading to a heightened risk for thunderstorms and severe weather that does not bode well for crops there to catch up.
Something else to note this week is the possibility of a rising Canadian dollar.
The U.S. federal reserve left rates unchanged at its meeting last week but noted almost half of its members want a cut in the future if the trade war with China further slows the American economy and keeps inflation at an anemic pace.
The Fed benchmark rate is now at 2.25 to 2.5 percent. The Bank of Canada rate is at 1.75 percent and the difference puts the Canadian dollar at a disadvantage.
But Canada’s May inflation jumped to 2.4 percent and the unemployment rate fell to a 43-year low of 5.4 percent, indicating the economy is heating up. There is not much chance of a bank rate cut here as long as economic indicators show a growing economy.
If the U.S. Fed drops its rate and Canada holds steady, it will give the loonie strength.
Also, the rising tensions between the U.S. and Iran lifted oil prices, providing additional support for the loonie.
Speculation on this scenario last week lifted the loonie to a three-month high, which weighed down canola futures.