The Focus: Planting Intentions; Then Weather
It has been a wild time in the markets over the last six weeks, as of this mid-March writing. Futures markets for corn, wheat and soybeans gave us significant rallies that took prices back to much higher levels than most analysts had anticipated. These rallies were the result of:
• Very strong world demand for wheat, corn and soybeans. This has led to increased export forecasts from the U.S.
• There have been few soybean purchases canceled by China. The market had been full of rumors for several months that China was going to cancel a significant amount of U.S. soybeans and buy cheaper soybeans form South America. That didn’t happen.
• World vegetable oil markets have finally rallied significantly from their lows. The rally was caused by drought-reduced palm oil production in Southeast Asia and strong demand.
• The geopolitical problem between Russia and the Ukraine has created some degree of doubt about the Ukraine’s future as a reliable exporter. There have been no issues with shipments from the Ukraine so far, but it appears this story might be far from over. It was enough of a story to create some short-covering by traditional trading funds.
• Major logistical problems across Canada continue to slow the movement of grains and oilseeds from the Canadian prairies to export markets, including to the U.S.
• U.S. railroads are also struggling to handle increased demand, and freight is trading at historically high levels.
• A few weather concerns are starting to attract some attention. It remains very dry across the Southern Plains, and that will start to trim expected winter wheat yields.
• Recent USDA reports have reduced corn and soybean ending supply levels. This has been contrary to most expectations. It is a signal of strong world demand.
An important residual benefit from the February rally is that February is the month the initial crop revenue protection price levels are calculated. The result was much higher levels of revenue protection than was anticipated. This is very good news for producers as we head into the planting and growing season. The coverage levels aren’t nearly as high as the previous two years, but are still not too bad, considering where they could have been had expectations of $3.50 corn futures and $10 soybean futures been realized.
The next hurdles for the markets are the March 31 USDA quarterly stocks estimates and the prospective plantings numbers. The market is somewhat fearful the USDA will find more corn in the quarterly stocks report. The USDA’s quarterly stocks report for corn has been very inconsistent, with larger-than-expected stocks reported on one report and a major change to smaller stocks in the next one. The January number was much smaller than expected. The market is also somewhat concerned that soybean acreage intentions might be much larger than expected — and that could be bearish for new-crop soybeans and other oilseeds.
It’s also important to remember that Canada had a record canola crop in 2013 and that Canadian farmers are projected to plant more canola in 2014. The severe transportation problems across Canada have masked this bearish supply because it is locked in farmers’ hands. That will eventually change, but no one is certain when the transportation system will improve.
Once the planting intentions are known, the markets will, of course, turn their attention to planting season weather and then on to the growing season. There are all sorts of summer weather forecasts around, and most of them seem to lean toward the possibility for a cool and wet spring season across much of the U.S., followed by a hotter latter half of the summer. The late-summer forecasts are not necessarily dry.
Several factors are involved in what some see as a potentially interesting growing season ahead:
• The super cold winter has drawn comparisons to the drought years of the mid-1930s. Apparently there are similarities in the weather pattern.
• Most meteorologists agree that we will be entering an El Nino pattern by late spring or early summer. That can mean a hot and relatively dry latter half of the growing season.
• El Nino might also have a negative impact on the Southern Hemisphere growing season.
We have encouraged clients to use this rally to finish pricing old-crop supplies and get some new-crop production contracted. Where new-crop prices go from here will depend on what gets planted and what 2014 yields are. If the world has great crops again in 2014, like it did in 2013, prices will be lower. However, if any significant production problems develop, we will again see higher prices and increased volatility.
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