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S.A. drought ending?

The recent South American (SAM) drought has pushed grain prices much higher in recent weeks, with corn pushing back above $6.60 March futures briefly or an 80-cent recovery from the recent lows. Now are encountering some resistance around $6.60-$6.65, and today's updated forecast puts more rain (the first decent rain in weeks) into the Argentine and southern Brazil forecast. That could be a rally killer depending on if/when the rain actually falls.

This is a critical time in the SAM weather forecast, as we are basically just past the 4th of July equivalent in the US weather-wise in SAM, with corn basically at or near pollination and soybeans just about to begin blooming. That couldn't be a more critical time during a drought, so if the forecast verifies in the coming days, that could spell the end of our recent rally. Of course, it also could be a false signal in an otherwise bullish market, and only the weather will determine whether this technical signal is solid or not.

Grains have rallied recently on independent strength, as it clearly is a weather phenomenon recently with the SAM drought underway about 3-4 weeks. That is against recent conventional wisdom, which has been that the grains move with other commodities and equities (as it has in recent years). But this recovery in grains has been done independently of most other commodities, as the weakness in other commodities has been mostly widespread in the month of December other than grains.  

That puts the recent rally in more jeopardy, especially if the weather forecasts shift to more prevalent rainfall -- especially in the parched areas of Argentina and southern Brazil. The rains could be falling just in time to resuscitate the yield potential of these crops. Of course, some irreversible damage has been done in the northern parts of Argentina, but much of Brazil can still be restored to its full yield potential.  

If the shift in weather occurs, the market also might start looking at the ideal weather that has occurred so far in northern Brazil, where temps have been moderate all year and precip has been generous. The northern Brazil crop has not suffered at all under drought this year, with steady rainfall so far and temps that have average below average virtually the entire growing season. That means that yield potential in this area is still extremely high, with record yields likely in this northern area of crop development. That could spell trouble for the recent rally.

Pro Ag notes that weekly export sales and shipments have continued to lag in recent weeks, with exports of corn, wheat, and soybeans all experiencing very slow exports to date. That could also spell trouble for the recent rally, as prices might already be allocating the short supply of 2011-12 by limiting exports of US grain. The world simply has more readily available supplies of grain for now, with the FSU countries of Ukraine, Russia, and Kazakhstan all having a very good harvest in 2011. That is allowing them to export aggressively out of the Black Sea, essentially taking a good share of what used to be US exports out of the region.  

Overall, a change in the weather pattern could forestall a change in the overall price pattern of grains, especially now with instantaneous response of price to changes in weather patterns. If the pattern change is back to more benign weather in Argentina, it could spell a quick end to the recent recovery. This might then be a good time to make catch up sales of crops. Pro Ag notes that 2012, 2013, 2014, and 2015 corn prices are all within about 50c of their all time highs -- price levels which are attractive to making catch up (or even new) sales. The question might not be whether to sell, but how much!!!   

The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. The opinions and recommendations contained are based on our judgment and do not guarantee that profits will be achieved or that losses will not be incurred. Recommendations should not be construed as an offer to buy or sell commodities. There is substantial risk of loss in trading futures and options on futures.

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