Squeezing futures market dollars from a large South America crop

by Drew Lerner
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Squeezing futures market dollars from a large South America crop
 

 

Argentina’s rough ride through the growing season has certainly kept the world’s commodity futures markets entertained this year, and speculation is still running high over the significance of damage done to 2017 grain and oilseed production. The same was attempted for Brazil crops earlier in the growing season, but no matter how you slice, dice and chop the crop production potentials in South America it still will be hard to squeeze extremely bullish dollars from this resilient crop.

Despite ongoing drought in the northeast of Brazil there is not much reason to find fault with the remaining crop. Well-timed rainfall and seasonable temperatures have prevailed across Brazil for most of the production year, except in the northeast. The latest vegetative health index reflects these conditions quite well with the general health of the crop outside of Bahia and northern Minas Gerais generally better than that of a year ago.

Last year’s Brazil production crumbled at the end of the growing season with dryness overspreading much of the north, hurting second season corn and some late soybeans across the region from Mato Grosso to Minas Gerais and Bahia. The odds of seeing that again in 2017 are very low. Even with the abating La Niña there is not much reason to expect much more than a “normal” finish to the rainy season. The next several weeks will be critical in determining Brazil summer crop production, and most indicators suggest additional timely rainfall for many areas.

Some late season dryness may evolve in a small part of Brazil, but if that occurs late this summer, it would have a bigger impact on second season corn than on soybeans. World Weather, Inc. believes the soybean crop is mostly locked in now, and the odds of seeing significant change prior to the end of the growing season are low. Second season corn is a little different, but there is little reason to expect any huge problems, although a few localized areas of dryness are still possible and maybe even probable.

Many market analysts and traders have finally realized the condition of soybeans in Brazil is very good and have turned their attention to Argentina and its weather problems. Before we leave Brazil, however, it is important to note that the condition of Bahia crops in 2017 is looking more ominous than the condition of a year ago. That is in spite of a significant bout of rain that fell early in the summer season that temporarily eased drought. The most recent Vegetative Health Index suggests Bahia crops are hurting from persistent dryness. Only 4% of Brazil’s total soybean crop comes from Bahia, and some of it is irrigated. Coffee and cocoa are produced in the state, as well, but they, too, are at least partially irrigated, trimming some of the potential loss from the state. There is some cotton and sugarcane, as well, but their bottom lines are just like the other crops, and losses will likely be countered by high yielding crops
from the remainder of the nation.

So what about Argentina? The nation’s corn, sunseed, sorghum and peanuts have all been beaten up by a roller-coaster ride of weather conditions this summer. Too much rain fell in late October when planting was under way, but that affected a small part of key soybean and corn production areas in northeastern La Pampa, far southeastern Cordoba and northwestern Buenos Aires. The crop was supposed to be lost back then, but steadily improving weather after that may have allowed more planting to take place than was expected.

Then along came the first three weeks in December when drought-like conditions and hot temperatures impacted Argentina. This was a seriously stressful period of time, but subsoil moisture was just beginning to be depleted in the third week of the dry spell when rain suddenly fell. The precipitation came abundantly, and the following three to four weeks ended up extremely wet with reports of flooding (some very serious) widespread in Santa Fe, southern Entre Rios and parts of northern Buenos Aires.

The two earlier periods of weather adversity in Argentina may have shaved some production off, but the crop was still doing relatively well. The recent flooding certainly has been significant, and crop conditions have deteriorated with some permanent loss suspected. Thinking back on other extremely wet periods in Argentina and the United States and the bottom-line impact on production is that a serious nationwide reduction in production from excessive rain is a real rarity. In the United States, it was only 1993 when the entire crop size was reduced because of the persistence, depth and breadth of flooding that occurred in that year. Argentina’s flooding this year is certainly serious, and production losses have occurred, but it is not a 1993 style loss, and World Weather, Inc. believes there will be a limit to the damage.

Late season doubled cropped beans will be planted in a developing better weather environment, which may help bolster some late season production potential, but it will not make up for previous losses. A smaller crop in Argentina is inevitable, but more than an 8% decline in total production will be hard to come by. If World Weather, Inc. is correct about the second half of the summer season being much less volatile, some crops may end up performing better than some analysts are expecting.

If this projection proves accurate, it will be difficult to squeeze many more futures market dollars out of the South America crop without a more threatening weather pattern evolving in the next few weeks. The marketplace will try hard to bolster prices, but without many other factors changing the demand for or production of 2017 crops a raging bull market run based on weather fundamentals will be much like trying to squeeze blood from the turnip.

In the meantime, hope for a dry summer in the rest of the world (Northern Hemisphere crops) has been hard to come by recently. Drought in the southeastern United States, central Plains and far western United States has been eased by an active winter weather pattern. The U.S. game is not over, and there is still time for weather to change, but given the late winter and early spring weather pattern that is expected it will be difficult to generate much of a bullish run for a while.

China is having one of its best winter seasons in recent memory with better-than-usual soil moisture across the nation suggesting winter rapeseed and wheat are poised to produce extremely well if spring weather is anything close to normal. Recent rain in parts of northern India benefited some rapeseed, millet, sorghum, wheat and pulse crops, although more rain is needed there. South Africa is having a much better summer growing season, and Europe and the western CIS winter crops have likely survived winter relatively well.

Early indications suggest that summer 2017 may have some dry pockets in the United States, Russia’s eastern New Lands and eastern China, but it is much too soon to determine the impact of those anomalies. These drier biased areas will not evolve for many months, leaving the near-term support for weather market mentality a status quo one or one with limited support for a raging bull market — at least for now.

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