Dryness in Argentina offers hope for market speculators

by Drew Lerner
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KANSAS CITY, MISSOURI, U.S. — Dryness in Argentina has stimulated a ray of hope for commodity futures traders and brokers who have been working hard in recent weeks to find a reason to be bullish about any agricultural commodity. The world’s trade has been in a lackluster mode ever since the U.S. harvested a record corn and soybean crop.

Weather conditions around the world in the past six months have been far removed from those of 2007 through 2010 when weather problems dominated the globe. Problems in France earlier this year and some issues in Canada’s Prairie and Australia were hardly enough to generate much trade interest with the U.S. producing a tremendous crop. Now, the pressure is on even more with Brazil headed down the same road as the United States with a tremendous crop in the making.

A strong attempt to run the markets higher last summer turned out to be a lot of hype driven by La Niña hopefuls in a speculative world. The bets were placed that La Niña was going to be the next leg up for commodities, and instead it has turned out to be almost as lackluster of an event as the marketplace. La Niña is on its way out, and with it are dimming hopes for a big rally. La Niña not only failed to produce a drought in the United States, but it has not had any negative impact on Brazil either — at least not through the first half of December.

But Argentina has come to the rescue for traders — at least for now. Dryness has dominated Argentina so far this month, and the dryness recently was accompanied by some very warm to hot temperatures to help stress crops. The lack of rain in the first half of December culminated in some serious crop stress that did reduce yields — at least for early corn and sunseed. The game is not over, though.

For those who believe Argentina’s dryness is a byproduct of La Niña beware that most La Niña events are a negative for early corn and sunseed production in Argentina, but weather often gets much better as the growing season advances, suggesting that relief will still occur to limit losses.

World Weather, Inc. is not convinced that Argentina’s dryness can be totally attributed to La Niña. There is a weather pattern prevailing in the background that is promoting periodic ridges of high pressure over the nation. If the trend is correct there may be a few other periods of warm and dry weather this summer, but they may be separated by periods of relief. The end result is that dryness in Argentina may not turn out to be a full blown drought in 2016-17, but perhaps enough problems with dryness will occur to further reduce the size of its summer crops.

Late season corn and soybeans in Argentina still have a good chance of performing better than the early crops, but it will be dependent on rainfall becoming better in the next few weeks than it has been recently. In the meantime, traders will have to battle large bearish overtones coming from Brazil’s potentially huge crops.

The weakening La Niña event may reduce some of the influence on Brazil to trend drier biased in the south during the next few weeks. The weakening trend also may reduce the potential for excessive rain in center west and center south during early soybean harvest season (which usually occurs in La Niña events) that might have helped rally the markets because of delays in both harvesting and the planting of Safrinha crops. La Niña’s weakness will diminish both of these trends, raising more support for a huge Brazilian soybean and corn crop in 2017.

The prospects for such a big crop in Brazil will make it extremely difficult for problems in Argentina to put the wheels in motion for a huge weather-related rally. The situation will be closely monitored, but with few problems seen in Australia, South Africa, China, India, Europe, the CIS, North Africa and North America during the next few months it will be quite difficult to generate a sustainable weather rally that would make traders and brokers happy.

The situation is not good for speculators, but it will be great for food companies since the potential for seriously rising food prices in early 2017 looks relatively low. Food grain and oilseed surpluses will help to keep prices for raw ingredients low enough to help profits in many bakeries and general food related companies.

In the meantime, what exactly is the status in Argentina? Relief from more than two weeks of dryness was expected in the week of Dec. 19, but with topsoil moisture rated very short and subsoil moisture short to very short on Dec. 16 it will be imperative that coming rainfall is substantially great enough to carry on normal crop development for more than a short-term bout of relief. Either a general soaking rain is going to be needed or a regular occurrence of showers and thunderstorms will have to occur to support the best production potentials. World Weather, Inc.’s Trend model suggests a period of relief is forthcoming, but more dry periods also are expected.

Stress will not be completely eliminated for the balance of summer, and some additional pressure for lower yields is expected. The brief breaks from dryness may prove to be helpful in curbing the potentials for a widespread serious drought, and that likely will leave Brazil’s big crop to partially offset Argentina’s reduced production. More rallies are still possible, but when the bottom line is in there may still be a glut of grain and oilseeds in the marketplace for a while.

Brazil’s moisture situation was nearly ideal at mid-month. No serious dryness was occurring in any major grain or oilseed production areas. Soybeans were flowering and setting pods, and sufficient amounts of moisture were in the soil to carry crops for a while without additional rain. The outlook for Brazil, however, is for additional bouts of rain to prevail for an extended period of time. That will leave moisture reserves plentiful for any period of drier weather that might develop during the heart of summer.

The same weather pattern suggesting periodic dry and warm periods in Argentina leaves much of Brazil with a highly favorable production environment. An eventual bout of dryness will come to Brazil, but its duration is expected to be short-lived enough to limit stress and strain on the 2017 crop. Be watching for a breakdown in any dry pattern that evolves in Brazil this season because the long-term trend supports timely rainfall more than any prolonged dryness.

In the meantime, South Africa is on its way to a much better corn production year after two dismal years. Its oilseed crop also will recover, although some of the western peanut crop is still dealing with dryness. There is need for rain in northern India for its rapeseed, wheat, groundnut, millet and pulse crops.

From a winter wheat perspective there is not much to get excited about either. Winterkill has occurred in portions of Alberta, Canada, and Montana, but most other production areas in the United States, Europe, the former Soviet Union, China and India are all experiencing mostly good weather. There is concern over dryness in U.S. hard red winter wheat areas and in India, but both areas are expected to see some precipitation before reproduction. India probably has the biggest potential to miss needed rain, but hard red wheat areas in the United States likely will find increasing precipitation late this winter and spring to bounce the crop back in a significant manner. 

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