Market weather doldrums for two more months

by Drew Lerner
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Argentina weather in the Southern Hemisphere this summer offered a few sparks to try igniting a significant change in fundamental market mentality. However, despite multiple attempts, no fire was lit under the futures markets to end what some would consider market weather doldrums.

The doldrums began with the demise of El Niño conditions in 2015-16 when it became obvious that weather was going to be favorable in many areas around the world. Last summer’s drought in western Europe was not enough to counter the huge crop year that evolved in the United States and a general improving trend in crop production around the world. Weather in 2016 was much less volatile than in the years from 2007 through 2014 and some have suggested that those more volatile years may have been a passing phase and that a more docile marketplace may emerge and prevail for an extended period of time.

There is always a lurking potential problem out there somewhere in the world and for some in the agricultural commodity world it was once thought that Argentina and Brazil would present the impetus for fundamental market change, but that has proven false with another huge Brazil crop of soybeans and corn likely coming forth.

Argentina weather in the past few months has been very entertaining, to say the least. The nation experienced flooding rain at the beginning of the planting season followed by a few weeks of unusually dry weather and then several weeks of frequent heavy rains and more flooding. Some hot weather was wedged in there between the wet and dry periods. Production losses have occurred in Argentina because of the wildly swinging weather extremes in 2017, but crops are amazingly durable. Even though there have been some seriously affected production areas, the losses are just not likely to be great enough to counter the huge production from the United States last year and the very large crop expected from Brazil this year. Once again, despite a tremendous amount of weather volatility, the sparks of worry over production have fallen short of reality leaving weather market support in the doldrums.

ENSO conditions

What about the Northern Hemisphere? Is there hope for trouble in 2017? There does seem to be some hope for a few weather-related issues, but most of them will not be around for at least the next three months. Much of the potential for change will lie upon ENSO (El Niño/Southern Oscillation) conditions — once again. Some computer forecast models are predicting El Niño will make another appearance later this year, but confidence is not very high. If El Niño returns it would do so in the second half of the year with perhaps some transitional weather patterns showing up late in the second quarter. World Weather, Inc. believes forecasts for El Niño — at least by some agencies — are well ahead of themselves. Ocean temperature changes do not support an aggressive evolution toward El Niño even though the U.S. National Oceanic and Atmospheric Administration’s (NOAA) ENSO model suggests El Niño is possible by April 1.

El Niño would offer some important changes in the atmosphere around the world that could threaten production potentials. However, ENSO conditions will have to change significantly by June to accomplish a significant threat to southern Asia crop production in 2017. El Niño would have to be in an aggressive evolution by the time the southern Asia monsoon begins in order to threaten a cut in production deep enough from India to Vietnam, the Philippines and Indonesia to harm production potentials of many grain and oilseed products. If the El Niño event proves to be a very weak one or evolves even later than the start of the third quarter the odds become small that it would have much influence on world agriculture production.

In addition to those thoughts, the United States (with a couple of impressive production years already behind it) would have the potential to experience another year of timely rainfall and no oppressive heat if El Niño evolves quickly. Such conditions would likely lead to more market doldrums, especially if problems in southern Asia are not fully realized until the fourth quarter or early in 2018.

World Weather, Inc. does offer a little hope for some change in market mentality. India rainfall in recent neutral ENSO years has not been abundant and could be less than usual rain in 2017 with or without El Niño. The situation is not likely to be very serious, but it might contribute to some change in market mentality if a few other changes evolve.

China is not likely to have many crop production problems in 2017, although the east-central coastal provinces may experience less than usual rainfall without El Niño. If El Niño tries to evolve in a weak manner, the drier bias in east-central China would have a tendency to shift westward into the heart of one of China’s more important production regions (the North China Plain). This China potential would only occur if El Niño begins to evolve in the spring and continues present into the summer.

Another area of potential problems does exist in Russia this year with spring flooding possible followed by some dryness in the New Lands region if there is no El Niño event. If, however, there is some evolution toward El Niño, the dry summer scenario would likely go away.

World Weather, Inc. believes there is potential for some dryness issues in the United States this spring and summer if there is no aggressive movement toward El Niño. That dryness will begin in the lower Delta and a part of the Tennessee River Basin this spring with some expansion northwest into the western Corn Belt during the summer. If El Niño evolves, the same dryness in the central Gulf of Mexico Coastal States would likely expand to the east and slightly to the north resulting in a broader region of dryness that would threaten much of the southeastern states in July and August.

Obviously, the potential ENSO event is setting up to be the single most important part of the 2017 Northern Hemisphere forecast. If the event evolves, the United States and Russia will do better and China may trend a little dry along with portions of India and the southeastern Asia countries. Without the ENSO event, Russia and the United States may see some expanding dryness, but in both cases it is not likely to become a critical event, but just enough to shave off some yield. If El Niño evolves and prevails into the Southern Hemisphere summer of 2017-18, South America crops could produce well, especially in Brazil … again.

Australia might run into some trouble with its winter grain and oilseed crops in 2017 if El Niño evolves significantly, but that continues to be the problem. World Weather, Inc. does not expect a significant El Niño to evolve, and what we do see is expected to be too weak of an event to have much pull on world weather trends and market production.

The bottom line to this is obviously no clear signal right now. However, with that said, confidence is high that most anomalous weather trends advertised in 2017 are not likely to be significant. The best futures market interests can expect for this year’s weather is some serious basing in market prices with some upward movement in futures’ prices in response to weather change and the potential for volatility and threats to production later in 2017 and 2018. The weather doldrums are destined to prevail for a few more weeks, but then the speculators will emerge and the sparks will begin flying again. Whether or not a blazing market run can emerge based on true weather problems is not known. But when the bottom line rolls around for 2017, world production will be a little less abundant than 2016.