Grain run over?
The recent South American (SAM) drought has brought a great deal of attention to the grain markets recently, with corn and soybeans rallying to two-month highs on strong gains of 80c in corn and similar percentage gains in soybeans. The media talk is of a drought on a level unprecedented in recent times, but the hype might be more than the facts.
Add to that today's bearish USDA report, and its likely that grains may have had their run higher for now, and will likely test the recent lows, or at least, the bottom bounds of the recent uptick in prices. USDA ending stocks projections for US and world numbers were hiked considerably from trader expectations, and that should weigh on the markets the coming weeks (unless SAM weather remains dry in southern areas).
The facts suggest that while SAM rainfall amounts have been very light in Argentina the past four weeks, the temps have not been all that hot, and even not that warm in many areas of Argentina. Brazil has been far from warm, with most of central and northern Brazil seeing cooler than normal temps during most of the growing season thus far. Combined with early planting in Brazil, these are nearly ideal conditions for maintaining high yield potential, and that is likely to be shown in the USDA report for January 12th. While many in the trade expect significant drops in both Argentine and Brazil production, they might be disappointed in the Brazil estimates. Instead, Pro Ag expects southern Brazil to show some yield loss from recent poor rainfall totals, but central and northern Brazil might largely make up for that lack of yield potential in the southern areas.
While no one disputes the Argentine dry spell the past four weeks reducing yield potential, there is considerable variation over how much damage has been done by the lack of precipitation. While some tout that this is a superdrought, temperature records show we are a long ways from that situation. In particular, we hear some northern plains commentators and northern corn belt people talking about similarities between extremely warm temps in that US region the past month and the Argentine temp deviations from normal. But there really is no comparison - the northern Plains/northern Corn Belt has seen temps average 10-20 degrees above normal this winter (which is a pleasant surprise, but no market impact).
Argentina has barely seen temps above average - maybe 1-4 degrees for the 4 week period in the most affected area. Instead, the problem is more limited to the rainfall problem - or lack of rainfall to be more exact.