Weather’s grip on grain markets begins to weaken

Weather-related issues in the U.S., which have provided ICE Futures Canada canola futures with much of its support, seemed to run out of some steam during the week ended July 13. The three nearby months managed to post gains of roughly C$3 to C$5 per tonne, while the further-out months actually lost ground.

Early in the reporting period, the hot and dry weather which threatened soybean yields in the U.S. encouraged some significant price gains. However, in what was conceived as a bullish supply/demand report from the U.S. Department of Agriculture due to the government agency’s tightening of U.S. and world soybean stocks, the rally in Chicago and Winnipeg came to an abrupt halt.

A number of market participants were quick to point out that if futures can’t rally on bullish news, the top of the market may be in.

Indeed, canola values did run into some profit-taking, with the backing away by domestic crushers from the market also erasing some of the upward price movement. The gains in canola were further tempered as elevator company hedge selling increased substantially. Much of that selling was tied to the increase in farmer deliveries of canola into the cash pipeline, with producers hoping to take advantage of strong cash bids.

If it had not been for some late-week Chinese inquiries into the availability of Canadian canola and some revised weather outlooks in the U.S. calling for an upturn in the heat cycle, the three nearby canola futures may have been pushed lower.

Some decent two-way commercial trade was evident in the new barley contracts on the ICE Futures Canada platform this week, with values moving sharply higher. A lot of that had to do with the sharp jump in U.S. corn futures, but tight feed barley supplies in Western Canada further encouraged the upward price action.

Milling wheat and durum contracts also experienced gains, with ICE Futures Canada behind the upward price push in an effort to keep values in line with the price action in Minneapolis.

Corn futures led the price advances seen in Chicago during the latest week with tight old- and new-crop supplies stimulating the strength. The absence of precipitation has significantly reduced the yield potential of the crop and there is little hope that rains at this late date will be able to do anything to recover some of the loss.

USDA, in its supply/demand balance tables, released some very supportive numbers, with the estimates even coming in below pre-trade expectations.

USDA slashed its forecast for this year’s corn harvest, projecting that the crop is no longer likely to set a record because of a worsening drought in the Midwest. The department pared its estimate for this fall’s corn yield by a higher‑than‑expected 12 per cent from its forecast last month, to 146 bushels an acre from 166 bushels an acre. Analysts on average had expected a forecast of 154.1 bushels an acre.

The forecasts initially seemed to heighten worries that the corn crop could shrink enough to keep supplies strained late this year. But the USDA report wasn’t enough to sustain those higher prices, as traders said the agency’s corn estimates fell below expectations only because traders had expected USDA to take a more conservative stance.

“Even though the yield was under market expectations, we got exactly what we wanted,” a market participant commented.

Soy support

Soybean values in Chicago were also able to maintain enough upward mobility to push higher on the week. Good export demand reduced yield prospects because of the heat and dry conditions, and tight world supplies helped to generate the advances.

The taking of profits and the inability of futures to move up on the USDA report ended up trimming some of the upward movement in prices.

USDA cut its yield forecast for the U.S. soybean crop to 40.5 bushels per acre from 43.9 bushels per acre, due to the drought in the Midwest. Analysts on average had expected a smaller cut, to 42.3 bushels an acre.

Wheat futures on the Chicago, Minneapolis and Kansas City exchanges posted some significant advances during the week. Some definite spillover from the gains seen in corn were evident, but the adverse weather which has reduced the size of the wheat crop in the Black Sea region further bolstered prices. Concerns about heat stress in the U.S. spring wheat-producing areas in the northern-tier states also propelled values to higher ground.

Strength in wheat also reflected ideas that global importers will need to turn to the U.S. to cover needs, especially with wheat production in Australia and China also being threatened by poor weather conditions.

The USDA report, meanwhile, also reflected tighter-than-expected U.S. wheat stocks. USDA forecast domestic wheat inventories at the end of the 2012‑13 marketing year to be 664 million bushels, below analysts’ average expectation of 725 million. USDA pegged total U.S. wheat production this year at 2.22 billion bushels, slightly below expectations for 2.25 billion.

A lot of the market direction that will be dictated in Chicago and Winnipeg during the short term will continue to be weather related. The weather in the U.S. remains hot, with very little precipitation in the cards. The absence of rain is now coming during the critical stages of development for soybeans. Considering how tight old-crop soybean supplies are, and the demand outlook for new-crop soybean supply in the U.S., there is little room for the crop to be downgraded much.

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