Early July has been a rough period for grain prices and all commodities.
Crop prices have been hit by a one-two punch of improving weather in North America and deteriorating investor confidence. Weather in the U.S. Midwest in the last two weeks was described as ideal. Rain has reached most dry areas of the western Prairies, improving prospects for crops that had not been already written off.
The United States Department of Agriculture also added to the price negative news with a report that increased the estimate of U.S. corn, soybean and wheat seeded acreages.
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This caused it to raise its production forecasts, with corn now at 12.29 billion bushels, three percent higher than estimated last month, the soybean crop at 3.26 billion bu., two percent more than in June and wheat at 2.112 billion bu., up 4.8 percent.
The report gave traders and grain users confidence that supplies will be adequate.
Last week, I suggested we shouldn’t get too comfortable with world wheat supplies because of production problems here in Canada, drought in Argentina and a developing El Nino threatening Australia.
USDA did shave its wheat production forecasts for Argentina to 9.5 million tonnes, down 1.5 million from the month before and Canada to 23.5 million, down 1.5 million. It cut European Union wheat to 134.65 million tonnes, down 1.3 million. However, those reductions were offset by increases to U.S. and former Soviet Union wheat crops.
The result was a global wheat crop forecast of 656.48 million tonnes, up 460,000 tonnes from June.
Australia’s recently seeded crops are getting adequate rain, brightening the production prospects there. However, an El Nino is slowly developing in the Pacific and it could cause dry conditions in Australia in the second half of its growing season.
An El Nino could also affect India’s monsoon. That country was alarmed in June when it received the lowest rainfall in 83 years, but since then rain has spread through the sub-continent. At the end of the first week of July, the monsoon was still eight percent below normal and reservoirs used for irrigation were low.
To play it safe, the Indian government this week cancelled its previous decision to allow wheat exports even though it has large stocks held over from last year.
Barring a sudden change for the worse in the weather, it looks like we are in for weeks, perhaps months, of a depressed grain market, mirroring the wider commodity and equity markets.
Through the spring, investors jumped on any news that indicated the world economy was pulling out of recession. But now many believe the recovery will be much slower than hoped and demand for commodities will not bounce back quickly.
The good news is that fuel and fertilizer costs are dropping.
Even potash prices, which had been held up by production decreases and a “no price cut” solidarity among the small group of producers, could come down.
Last week, Russian producer Silivint was reported to have signed a deal with Indian buyers for potash at $460 US per tonne, about 25 percent below the price range proposed by other producers. There is word that three other producers also agreed to supply the nutrient at $460.