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A perfect storm for grain markets

01/05/2012 @ 3:04pm

The weather forecasts and the upcoming USDA reports have combined to produce some large market moves this week and potentially next week as well.    

For the past two weeks or so, the markets have been concerned about dry weather in Argentina and southern Brazil.  This is typical of La Nina conditions.  Planting season went well in South America, but now that the calendar has turned to what amounts to July, dryness has overtaken.  This has been the major bullish factor in the rally since the middle of December.    

This is not a drought that has spread over the entire South American growing area.  The major northern growing areas of Brazil are in very good shape.  Plus soybean planting started early this year so there are already reports of small amounts of harvest.  Concerns begin in the state of Parana and spread south to Rio Grande do Sul and the main crop areas of Argentina.    

The focus of estimates of crop loss is on corn, due to the fact that it is prime time for pollination.  Parana, Rio Grande do Sul and Argentina are all prime corn growing areas.  There have also been pictures circulating on the internet of drought affected Argentine corn.  

Since weather is involved, for South America, the situation can change with each new run of the forecast models.  For right now, the story has a bearish slant as rain will fall in Argentina and southern Brazil beginning on Monday night.  This does not appear to be a pattern change, but rather a one-shot decent rain followed by dry weather.  

A non-weather story in the market is all the data coming out before the USDA reports which are now just one week away.  This is a story that could be either bullish or bearish.  Private crop estimates due out late this afternoon and tomorrow morning during trading could go either way.  Recently, there was been some underlying concern in the market that the final US crop sizes will be smaller and that corn feeding could result in a small quarterly stocks estimate.  

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The risk of loss in trading commodities can be substantial.  You should therefore carefully consider whether such trading is suitable for you in light of your financial situation. 

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