Are crops going to rise or fall into spring planting time in North America?
That’s something I’m wondering about as I ponder South American weather, North American crop competition and a longstanding equity market observation.
South American weather has been having an effect on the market, as dryness has worried buyers that the Argentine and Brazilian harvests may be shorter than projected. That may be what has led to the rally since early December. Further weather problems could drive prices higher, or they could already be factored-into the market. As the crop down there progresses, there’s a chance that big bads or goods could happen and rock the market.
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But if there is no major weather improvement or disaster, the South American factor may not be dominant. This is about the time of year the markets have to begin “buying acres,” offering good enough prices to encourage farmers to grow particular crops rather than competitors. This year it’s quite a mess to sort through to figure out which crops the market needs most come fall. How much demand will there be for corn for ethanol and soybeans for biodiesel? That depends a lot on both oil prices (a crapshoot) and government actions to promote the industry. How much wheat acreage is needed? This winter American farmers planted four million fewer acres of winter wheat. What does that mean for where supplies will be come fall?
It’s safer to guess that the market isn’t going to bother much at all with bribing farmers to grow oats. The stocks are too big, both on farm and in commercial storage. If oats go anywhere, it’ll be because of an overall crop market rally or a corn rally.
But while there will be jockeying for position between the various crops in terms of relationship for the next couple of months, the overall crop complex is still going to be subject to that South American situation and how it resolves. I’ve recently heard two contradictory forecasts for what’s likely to happen:
1) Weather problems are likely to continue and the market will continue to push up prices as the southern harvest progresses.
2) Weather problems are likely to continue but not become radically different, leading to a general relaxation of the fear factor that has raised crop prices beyond the slight reduction in South American production that is likely.
This second take is interesting because it’s an ag version of the “wall of worry” concept common in the equity markets. The idea is that stock prices tend to rise soundly when the markets face a whole bunch of fears that are alleviated one by one. The common phrase is: “Stocks climb a wall of worry.” Worries hold the prices down at first, but as they disappear stocks rise, rise, rise, rise. In the end, it isn’t a great outlook that takes the prices up, but the disappearence of a crappy outlook.
In crop prices, if this happens, it’ll be an inverse version of “stocks climb a wall of worry.” It’ll be crop prices sliding down a slope of relaxation.
We’ll see what happens. This is a time of year when oilseed prices generally weaken, because of the alleviation of fears in South America, before the spring North American market takes over.
