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South American weather problems emerging?

Ray Grabanski 12/17/2013 @ 8:50am President, Progressive Ag www.progressiveag.com

Last week we talked about how the focus of the market is turning to South American weather. That is starting to become more apparent with soybean prices holding their own while corn is testing recent lows, and wheat plummets to new recent lows in the market. The demand for corn and wheat remain lethargic, but the demand for soybeans is outstanding, as evidenced by recent weeks of strong export sales and shipments.  

So far weekly export shipments data (released again yesterday) continues to support soybeans, with 62.5 mb shipments in this report. But corn (only 25 mb) and wheat (only 17.5 mb) were disappointing.  That continues to plague the wheat and corn market, which are both finding disappointing price discovery, downtrends perhaps. These downtrends include new recent lows for wheat, which seems to continue to reel from news that Canadian crops were grossly underestimated all the way to December, when they revised the wheat/barley production 10% higher, and durum/canola 20% higher.  These huge revisions late in the game continue to remind us that the U.S. final yields for corn and soybeans also could be devastatingly bearish as well.  

While the recent focus of the market has been on the realization that we will not run out of grain in 2013, the South American production season is becoming more important as we enter what is similar to late-June in the growing season for SAM. Through the planting season, weather was nearly ideal with benign weather throughout the planting season, resulting in planting progress being slightly ahead of normal throughout the year. Now planting is vitually complete, and attention now turns to the weather forecasts during the growing season. The recent weather forecasts have turned from moderation in temps and precip to more limited precip in southern growing regions.  

As of today, SAM weather forecasts continue to call for warm/dry weather in Argentina and southern Brazil the next seven days, but thereafter the forecast calls for rainy weather in this region. However, if the seven-day forecast continues to hold for the next few days, it will start to look like a warm/dry weather pattern is developing for SAM (a bullish development).  

That could change the outlook for soybeans most specifically, but also could result in support to corn and wheat prices as well. But a change in the weather back to more normal precip and temps in southern SAM would also have bearish implications. That will mean monitoring South American weather over the next few months, which will have a major impact on grain markets, especially soybeans.  Absent a SAM weather problem, it;s likely cash soybean prices will continue to deteriorate into next fall, when the U.S. is likely to harvest several million more acres of soybeans, and add to the soybean carryout at present.

We targeted 6.21 Dec CBOT wheat to take off 50% of wheat hedges at $2-$3 profit, hit last week. We've taken off 75% of corn hedges at $4.25 Dec, $4.26 Dec, and $4.11 Dec (25% each) taking over $2 profits on all these hedges. Final Pro Ag downside price targets for this year's crops had been $4.25 corn, $11-$11.10 soybeans, and $6 CBOT wheat. With continued weakness in corn, let's take off another 25% of hedges at $4.01 Dec corn or better, and in wheat take off another 25% of hedges at 6.11 March CBOT wheat.    

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