Grain futures prices appear to have resumed their rise, supported by weather issues around the world and currency fluctuations.
Last week, I wrote that the rally might run out of steam this month if North American weather remains favourable, the United States winter wheat harvest starts and forecasts show U.S. farmers made a big last minute switch into soybeans.
But I wasn’t figuring on another round of heavy rain in Argentina and torrential rain and flooding in France threatening production in those countries.
Also, I was wondering if the market would focus on current good North American weather or fret over a potential trend toward dry weather in July or August.
The jury is out on that one.
But certainly the market has focused a lot on Argentina’s problems. I am surprised by how much the market has moved on a four or five million tonne decrease in Argentina’s soybean crop.
It seems that the market thinks the global soybean supply and demand relationship is tighter than the gross numbers would indicate.
Also, beyond the tonnage de-crease, there is also a quality decrease that means part of what is harvested will be rejected by the international market. So while production might be down around 10 percent, Argentina’s exports are expected to fall by 25 percent.
And now there is more rain.
Argentina’s farmers still had 20 percent of their soy crop left to harvest when the latest rain hit.
New crop November soybeans have rise by about 9.5 percent from the beginning of May to the start of this week.
The meal component of soybeans is where the real strength is with soy oil trailing and that helps explain why November canola since May has risen only a little more than six percent.
Meanwhile, corn futures are rising on problems in Brazil. That country produces two corn crops each year.
Exporters were aggressive with sales from the first crop, taking advantage of the weak local currency, the real.
With so much of the first crop exported, the second crop was important to meet domestic needs.
But dry weather is sapping the yield potential of that crop and livestock feeders are already running tight on supplies.
Domestic corn prices have risen to a record high and livestock producers are losing money.
The trade expects that the U.S. corn will pick up more export business because of this.
In France, the flooding Seine River reached 30-year highs, indicating the intensity of the rain that hit large parts of western Europe.
The country’s agriculture ministry said the wet weather would likely promote the spread of insects and disease that will stress crops and lower yield potential.
It forecast rapeseed yields would decline five percent from last year, offsetting an increase in seeded area, resulting in an expected production decrease of 3.7 percent.
Winter barley yields might fall six percent and wheat would also likely suffer.
Rain has been abundant across Europe into Russia. The adage is that rain makes grain, but there is talk in the marketplace that quality could be hurt.
In the U.S., the winter wheat crop in the southern Plains, corn and soybeans in the Midwest and spring crops in the northern Plains all are in good shape. Western Canada’s crops are also generally doing well.
Moisture is adequate in most regions although parts of Saskatchewan’s northern grain belt have less than normal rain.
June rain forecasts look OK, so overall, I’d think that the market would be feeling comfortable.
But some analysts continue to bang the drought drumbeat for the summer and that helps to price in weather risk to the market.
For many weeks now the big question asked has been when will the dry weather hit. The equatorial Pacific is still rapidly cooling and is on its way to a La Nina.
Bryce Anderson, weather analyst with DTN, thinks the likelihood of real dryness will not develop until August. That would be the tail end of kernel filling for corn, but right in the middle of soybean pod setting and filling.
Currency is another market factor. In May, the U.S. dollar had risen against other major currencies on the rising expectation of an interest rate hike sometime this summer.
A strong greenback tends to apply downward pressure on U.S. crop futures as it makes it more expensive for foreigners to buy U.S. grain.
But a rate hike depends on signs of a stronger U.S. economy, particularly in job creation, but in May only 38,000 jobs were added, far below expectations of 164,000.
That killed any expectation of a rate hike in June and likely a July increase is out too.
So that should put off a U.S. dollar rally and that should help keep a favourable outlook for American crop exports over the summer, helping to shrink year-end stocks.
That also means the Canadian dollar will rise but regardless our crop stocks should been pretty small by the end of the crop year, so it should not be that much of a problem.