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Looking at a weather market

This commodity outlook from Rayglen Commodities may 
help you decide what to put in the ground this spring

“14 day forecast for the U.S. Midwest looks hot with not much chance of rain!”

Hearing these words this spring as a Canadian grower will likely lift your spirits, even though it means the drought is extending for wheat, corn and soybean farmers in the U.S. It is too bad that others have to come upon hardship in our industry before we can truly excel, but that is the way it is and probably the way it will always be.

Weather market

The term “weather market” is almost as prolific as the term “acreage war.” We’ve all heard of acreage wars — users of offsetting commodities will try to encourage acres of their crop of interest by putting a value on it that is relatively higher than its competitors. It’s not about absolute prices but about relative prices.

The big three

Corn: Some might call the corn market a “made in the U.S. story.” The size of the U.S. corn crop, its exports and usage often tell the tale. Beans and especially wheat have multiple growing areas in the world, which helps to take pressure off U.S. production. This year corn has seen massive feed/residual use, but offsetting this is the fact that U.S. corn has witnessed its lowest export sales commitments since weekly reporting began in 1987. Another demand deflator has been the ethanol production numbers; ethanol production is at the lowest levels since U.S. ethanol statistics began.

For prices to jump in corn above the early February levels it would appear gasoline demand will need to spike as all other demand has almost been curbed. With only an estimated 19.5 days of use, corn is extremely tight (compared with 2009-10 at 47.7 days, 2010-11 at 31.5 days and 2011-12 at 28.8 days).

Beans: February 1, 2013 saw 126 ships lined up at Brazilian ports to execute on delivery commitments for their new crop. That is pretty strong evidence that the world “needs” their crop. We all know there will be logistical challenges and some feel that buyers will come to the U.S. if that becomes a prolific problem, however, many world users have become disciplined and will hold out if they know that cheaper product is accessible within a few more days.

U.S. bean commitments this year have been the third largest in history so they are tight with an estimated 16.1 days of use left (this compares to 2009-10 at 16.4 days, 2010-11 at 23.9 days and 2011-12 at 19.6 days).

If the South American harvest is deemed to be disappointing it will lead to an acreage battle south of the border this spring, which in turn, will benefit Canadian farmers.

Wheat: Although wheat can be grown on any arable acre of land in the world, most are putting their spotlight on the Northern Hemisphere crop size. The U.S. winter wheat conditions are at the worst since “the dust bowl” of the 30s and that is making many nervous. However even a crop that is 10 per cent smaller than last year will not bring milling wheat supply down if the corn crop is large enough to meet feed and ethanol demand.

The small corn crop last year made wheat a cheaper option for lot of livestock producers and ethanol plants and that demand won’t exist unless there is a significant shortage of corn. Production in the Black Sea region is expected to rise this year, the EU27 is in excellent shape at the moment, and India has recently become a much bigger player in the world wheat market. India has been a hot topic for a couple years now as their wheat production has exploded since 2005 and supplies are at colossal levels. Yes, Indian wheat is not the best quality but at a $30 to $50/mt discount, not everyone cares.

So to answer the question, yes, we are in a weather market, but weather markets are not made in and of themselves; the supply and demand balance needs to be affected to truly bring it to the forefront.

Global conditions

The ebb and flow of the market will continue as it always does, demand will pick up in some areas but fall in others. Supply is always being affected in some way in the world; it’s a big place. Just think about how much production changes within 100 miles of your own farm in most years.

Key industries like ethanol will not be as important in the future as other more efficient energy producing systems work their way into the grid, but maybe the world population will gobble that production up? Supply and demand changes almost as often as the weather but the current weather market we are in should continue into at least early spring. What happens in a few key areas is going to be the driver of prices going forward (everything else being even).

We can never anticipate the macro global conditions that can/will affect our commodity prices like civil war, export bans, monetary stimulus, and just how many beans China actually has locked away. These are things (along with many others) that we cannot control, truly anticipate or monitor. However, we can watch the weather and there are some great people out there that are doing just that. Personally keeping an eye on what is going on around the world in key production areas and paying attention to what is actually happening in those key areas is something we can all do.

At the end of the day no matter how well we strategize or anticipate, Mother Nature will have the final play and the final say. †

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