Calm before the storm?

by Drew Lerner
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The overly hyped greatest El Niño since 1950 did little to help world agriculture trade in 2015. Despite doom and gloom forecasts and outrageous predictions for calamity due to El Niño’s influence on world weather, most agriculture commodity trading contracts saw nothing but lower prices in 2015. Obviously, weather-related issues have not had a huge influence on market decisions, or have they?

El Niño has not really been much different than that of the 1982-83 and 1997-98 events, and the impact has been perhaps a little anti-climactic after all of the alarming predictions. Listening to the media, one would think that Brazil’s adverse weather in the past few weeks would have been enough to send grain and oilseed prices higher. There are obviously other influences on world trade other than weather, but just listening to and reading the coverage of Brazil’s production problems in 2015-16, one would think there would be some incentive for higher prices.

The truth is that soybean producers in Brazil have been lobbying successfully for weeks to get their planting season extended. It was extended to Jan. 15 and now lobbyists are working on a Jan. 31 extension. Brazil has such a unique growing season that it can plant two crops in its rainy and warm season or it can just plant one crop. The most interesting fact about the latest lobby movement is that soybean producers are likely to win their way into getting the planting season extended, and in doing so they will be allowed to plant new crops and replant damaged soybeans as the rainy season kicks into high gear in the next few weeks.

Weather patterns were already changing at the end of December and into the early days of January, and this trend will continue. The change will bring greater precipitation to northern Brazil and less rain to southern Brazil which is exactly what producers need after weeks of El Niño-influenced anomalous weather. Being allowed to plant and replant soybeans until Jan. 31 will bolster soybean production in 2016, but at the expense of second-season corn. There have already been some deep cuts in expected second-season corn planting this year because of delayed seasonal rainfall in Brazil. If the soybean planting season is allowed to occur later this month, there may be a further decrease in corn planting intentions.

Meanwhile, Argentina has a large corn and soybean crop developing and that is not going to help matters much in stimulating a greater interest in price appreciation from a weather fundamental perspective. However, keep an eye on southeastern Argentina and southern Brazil. The weather in these areas, which has been wet during much of the growing season, may trend a little drier as reproduction comes along. No drought is expected, but the drier bias will catch the attention of the market trade in the coming weeks.

Drying in Argentina and southern Brazil is not really going to be enough to fuel a turnaround in commodity weather trade, and it may still be difficult even when taking into account the dismal corn crop that will be harvested from South Africa this summer. Dryness in South Africa has become very serious and it may continue that way for a few more weeks, assuring a smaller coarse grain and oilseed crop from that nation. Soybeans, sunseed and corn, as well as many other crops, are struggling today because of dryness.

Australia weather remains better than expected for an El Niño year, and that has been ongoing and will likely continue. However, from a small grain perspective, dryness has recently become a concern in India, Morocco, northwestern Algeria, and eastern Spain, and for a while there was concern about Turkey. Again, these areas are not suffering enough and are not big enough players to push the commodity trade into frenzy buying.

Keep an eye on the U.S.

Is there a potential weather issue on the horizon that can help these markets recover?

World Weather, Inc. believes there is, and it may be in the United States during the spring and summer of 2016. These minor issues mentioned in South America, South Africa, Morocco and India might help provide some support in the next few weeks, but worry is likely to evolve over U.S. planting weather by March when it may become obvious that El Niño is still powering frequent wet weather into the southeastern U.S. and lower Midwest, raising concern about planting delays.

By March, forecasts for the El Niño Southern Oscillation (ENSO) will be more reliable. Scientists will know more about whether La Niña will develop or whether neutral ENSO conditions will dominate the North American growing season in 2016. It is very interesting to note that there will be a drier bias in portions of the United States in 2016, whether there are neutral ENSO conditions or a La Niña during the growing season. Statistics show that neutral ENSO summers that follow strong El Niño events in the first quarter of the same year tend to result in below average precipitation over the western Corn Belt and portions of both the mid-south and southern Plains. However, neutral ENSO late spring and early summers following strong El Niño events tend to be cooler biased which tends to reduce the impact of below average precipitation, but the below average bias remains in place. La Niña in the growing season following a first quarter strong El Niño nearly always results in warmer than usual temperatures throughout most of the U.S. crop areas from May through August.

In addition to the ENSO biases, there is still a prevailing weather pattern that we like to refer to as the 18-year cycle that is already signaling below average precipitation in the lower U.S. Midwest, southeastern states, Delta, and parts of the southern U.S. Plains for summer 2016. A below average precipitation bias is not a drought, but if La Niña becomes the forecast for the summer the expected warmer bias that comes with La Niña and the reduction in rainfall that is often present will take the prevailing 18-year cycle drier bias and exacerbate it into something worth watching. You can bet the market place will be on top of this potential event.

It is very important to keep all of this in perspective. A full blown La Niña event evolving in the middle of summer would not bode well for U.S. crops. Neutral ENSO conditions and the 18-year cycle will work together to restrict precipitation later in the summer, but only after a wet spring and some planting delays. This latter scenario is not a death sentence and it does not even assure a problem in production for 2016. But that is not what is needed to get markets moving higher again. All that’s needed is a perception of potential problems in 2016 and we are sure to see a classic turnaround in subdued markets.

World Weather, Inc. and none of its staff are allowed to trade commodities so that its forecasts stay unbiased and focused on weather trends alone. With that said and the additional information noted above, we fully expect a more volatile marketplace by the time March rolls around.

There’s also the potential for El Niño to weaken and not end. That, too, would not go over very well in world grain and oilseed production. Such an event might improve U.S. production in 2016, but it would set the Canadian Prairies up for another drought year and could have a negative impact on India, all of Southeast Asia as well as Central America, Australia and central Africa. Another year of El Niño is highly unlikely, but there is potential for an increase in market worry beginning soon, and it may be weather related because of the change from today’s strong El Niño environment to something different. And the change is likely to bring new worries and perhaps some price appreciation.