Market Volatility Rises, Weather In The Background

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Grain and oilseed prices at the ICE Canada futures market closed the week ended July 31 higher in a very volatile week. The steep rise in the Canadian dollar weighed on the market. Canola dropped sharply early in the week, only to roar back and finish the week a bit higher as gains in the U. S. market and weather uncertainties boosted prices. Talk of Chinese interest in canola helped to boost prices. Interestingly though, trading volumes were on the small side and contributed to the volatility. Western barley also saw a volatile week ending modestly higher. Firmness in U. S. corn and slow farmer selling helped to boost values. Here also trading volumes were light.

Chicago soybean and corn futures posted fairly strong

gains in a volatile week. The falling U. S. dollar gave support across the market. Soybeans were boosted by unexpectedly strong Chinese buying as they bought 1.9 million tonnes of U. S. soybeans (old crop and new crop) in one purchase. Talk of weather problems for the U. S. soybean crop also gave support. Corn futures rallied on strong export demand and on the gains in soybeans. In both corn and soybeans, bullish technical signals prompted strong speculative buying.

U. S. wheat futures saw only modest gains, boosted by the advances in corn and soybeans and on the weak U. S. dollar. Keeping the advances in wheat smaller was talk of a record-high yield for the U. S. spring wheat crop and the sluggish pace to export demand. By week’s end technical signals had turned friendly for wheat and there was slightly more aggressive buying.

The volatility that I had warned about came to the market with amazing force this past week. Canola prices first dropped to their lowest level of 2009, well below the $400 level in the Nov. contract. Commodity funds started shorting the market in anticipation of bigger losses. Weighing on canola was the strong Canadian dollar, the lack of fresh export demand and bearish technical signals.

However, sending the canola market to its biggest one-day gain since 2008 at the end of the week was the steep rise in the U. S. soy market and talk that Chinese canola demand this fall would be as large as the shipping program they had last fall. Weather concerns also surfaced as cold conditions appeared in Western Canada giving rise to talk about frost.

U. S. soy markets were also boosted by the huge Chinese buying that surfaced and the weakness in the U. S. dollar. For weeks traders have been predicting that Chinese soybean demand would drop off and for weeks China has been buying more and more U. S. soybeans.

Likewise for corn, the export demand has been exceptional and even with the supposed finding of millions of extra U. S. corn acres in the June 30 USDA report, ending stocks are likely to be lower than USDA has been estimating.

China is a market that must be watched, as they have an estimated US$2 trillion that they really want to unload. They feel the currency is likely to fall sharply because of the mismanagement of the U. S. economy. They have been big buyers in all commodity markets, including oilseeds as a result. Their buying is likely to continue and this supplies a strong, positive backdrop to soybeans and canola.

Weather has become a major factor in the markets as U. S. weather forecasters are calling for a high-pressure ridge to develop over the U. S. Midwest and block out other weather systems. This could lead to hot, dry, stressing conditions for the U. S. soybean crop as it enters the critical podding stage of development.

That same system will bring heat to the corn crop as it needs heat units to reach its maximum potential. However, if the heat stays around too long, it will stress the corn crop as well.

For Canada, with temperatures running as much as 10 below normal on the Prairies, the big concern is frost. The canola crop is about two to four weeks late and even a normal late-Aug., early-Sept. frost would be a problem for the crop. Everyone is hoping for a repeat of last year when frost was unusually late.

However, the current coolness has U. S. weather forecasters calling for frost earlier than normal on the Prairies.

The latest forecast from Drew Lerner of World Weather Inc. of Kansas City is calling for a heavy frost in Saskatchewan or Alberta by the middle of August. Lerner is well respected by the trade. He noted that this year seems to be very similar to 1965 when early frosts appeared in Canada and in the northern tier of states including parts of the U. S. Midwest.

This has made the Canadian trade very jumpy in the wake of 4C lows in the past 10 days in Alberta and Saskatchewan.

Besides North American weather, the Indian monsoon seems to have become very erratic and threatens their crops. We are already seeing unusual pulse demand in Canada from India because of the monsoon problems.

The monsoons bring rain to the Indian crop. In June this year the failure of the monsoon resulted in the main growing areas seeing the driest conditions in 83 years. Monsoon rains did pick up in July, but it was still 19 per cent below the 50-year average for July.

On top of the problems with the monsoon is a building El Nińo in the south Pacific. Six of the seven global weather models are forecasting at least a mild to moderate El Nińo. The warming of the Pacific affects wheat production in Australia and the palm oil production in Asia. A milder El Nińo has a more devastating impact than a severe one.

A mild to moderate El Nińo that takes hold in Sept. would cut the Eastern Australian wheat crop by as much as 25 per cent which would boost global wheat prices sharply. However, if the El Nińo holds off until October it would not have as negative an effect on Australian wheat output.

As you can see the world is perched on the thin edge of a blade that could have a devastating impact on global crops. It has been years since so many weather factors have come together at the same time to threaten global agriculture. Look for volatility to continue.

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