The table above from this week’s USDA Crop Progress report underscores the effect that delayed planting this year has exerted on emergence of the crop.  In spite of planting progress that has picked up over the last 10 days, some regions may start to run into situations where there will not be enough growing degree days in the season to make a decent yield, and as a result, acres in some regions may start to shift to soybeans which have a shorter the maturation cycle.

Here is an excerpt from the note sent to clients early this week:

…we have been highlighting the delayed start to the corn season in the US as a result of the cold and wet conditions, inhibiting planting progress.  Over the last couple of weeks, we have seen planting progress close the gap between the pace set last year and the 5 year average; in Monday’s USDA Crop Progress update, the major growing states were now 79% planted, vs. 92% this time last year and the 5 yr ave of 87%.  While some lost time has been accounted for in recent weeks, the crop is still behind.  The emergence chart above from yesterday’s report shoes that 45% of the crop is emerged, vs. 69% last year.  In any other year, this might not be a cause for concern, but with such a tight supply balance this year, which is expected to remain tight into early 2012 due to strong demand expectations, this will likely translate to a bullish outlook for  corn futures at least through September.  In spite of the recent decline, we advised clients that this dip may be a favorable entry point for July/Sep corn contracts, and our forward view still supports a constructive market…

This note in the Farmgate Blog echoes what we have been discussing, supporting our expectations that Weather Trends has been pointing to as risk factors for the last two months.  Mid-crop weather will become VERY important this season.

Earlier in the week, we noted that the US corn planting conditions have been suboptimal, with planting pace significantly behind both last year and the five year average for this date.  Cold wet weather has slowed field activities, particularly in the northern and central growing regions.  The USDA Crop Progress report for the week ending May 1st underdscores this point (see table below).  For the primary growing states, 13% of the intended acres were in the ground vs. 66% in 2010.  For potential yield modelers, we recommend using a ‘late-plant’ scenario for 2011.  This does not mean that the US can not make a decent crop this year, but it will highlihght the need for better post-germination weather.  We are looking at the cooler weather to give way to a milder and drier pattern over the next few days into next week, so we are expecting some of this gap to be closed over the next two weeks.

 While the broader ags and softs complex has softened recently, there may be a reversal around the corner, particularly for corn.  To support this assumption, readers should view the Food and Agriculture Organization (FAO) supply & demand brief which was released today.  In the brief, the FAO confirms that the 2010/11 estimated S-D balance has gotten worse approaching the end of the marketing year (see first chart below).  In their summary, they state that global cereal production is projected to decrease -1.2% for 2010/11 and this may add some upside risk to prices in the short term.  In addition, the second chart below highlights the difference in cereal prices vs. where they were one year ago as represented in the food commodity price index.  The overall price index averaged 232 points in April 2011 (+35% y/y) and the cereal price index averaged 265 points which is an increase of 71% over April 2010.

In light of the tight global S-D situation, even though the USD is showing signs of strength this morning, the broader downward trend that the dollar has displayed emphasizes the upside risk to grain/oilseed prices going forward.  Further, the notion of the necessity for ‘perfect US weather’ that many analysts have been calling for is already being tested, adding to the upside risk.  Even with the expectations for larger crops across many of the world’s primary origins, demand has not eased and the projection for shrinking grain inventories amid low stock to use ratios should limit downside activity concerning corn prices for July/Sep contracts.

Following the run up to nearly 33 cents, world (#11) sugar futures have retreated and stayed in the 22-24 cent range for much of the week.  The market is expecting strong production numbers from Brazil and India, the two largest producers, and there seems to be optimism among analysts that the global S-D balance will finally shift to the surplus side in the coming months.  In the USDA Foreign Agriculture Service (FAS) April attache report, their outlook stated that Brazil cane production will increase 2% (to 631 mmt) in the 2011/12 marketing year (MY), with 569 mmt of this volume coming from the Centre-South; the 569 mmt projection is +12mmt over the 2010/11 MY and largely the result of an expansion of hectares for sugarcane, rather than a favorable weather pattern.  See the table below taken from the attache report for harvested hectares over the last 6 seasons.  This is confirmed by the relatively flat total reducing sugar (TRS, or industrial yield) when analyzed Y/Y.  Readers should note that a drier pattern in key mid/late crop months actually serves to boost yields, and tends not to be an inhibiting factor.

While the Weather Trends view is also for an increase in Y/Y production for BR (between +1.3% and +1.6%), we feel that the USDA estimate may be too optimistic.  Further, even with higher production numbers out of Brazil, domestic ethanol demand for flex-fuel cars coupled with high crude prices will still keep a premium built into the #11 price, so the downside price potential remains limited between now and October.  Satellite derived vegetation indices for many of the Centre-South cane growing regions are on par with last year which was considered an average weather year for cane in BR.

Other FAS estimates carrying significance include their view for Indian sugar production to increase 10% for the 2011/12 marketing year (Oct/Sep) to 28.3 mmt raw value as a function of higher total cane production.  The April FAS attache report fort India includes the illustrative chart below from the India Ministry of Agriculture, which shows total cane production and sugar production since the 1990/91 MY.  This shows how in recent years, technological advances as well as the increased demand for raw sugar is allowing growers to extract more sugar per metric ton.  Last year’s gain was also in part due to higher plantings following the Monsoon failure during the previous 2009 season, so the first year in the new retune crop will provide the strongest Y/Y lift; we will still look for a similar increase this year as projected plantings are up again, but as with Brazil, the numbers may be slightly lower than the FAS expectation.

So what does this mean for price?  The onset and the seasonal behavior of the 2011 Indian Monsoon will therefore become a key factor in assessing yield potential this year, and this will be a key variable towards ultimately translating what the crop potential means for the global supply balance sheet into 2012.  Further, while Brazil is looking at a favorable supply scenario, ethanol demand, crude oil prices and the relative strength of the BR real will be equally important in assessing price risk and potential.  Readers are encouraged to refer to this site as more discussions around these topics will appear in the coming weeks and months. 

Please feel free to contact Weather Trends directly if you wish to have a direct consultation around these or other weather/commodity topics.

In a Bloomberg report this morning, the current food supply and price situation was aptly described as ‘Kitchen Table Economics.’  With uncertainty over the direction of food costs, underscored by a recent UN statement showing prices at new highs, where do we go from here?

In any given year, commodity researchers at Weather Trends spend a great deal time analyzing the global weather pattern in the context of a variety of commercial interests which span the agricultural and energy supply chain, from grower, to producer, to investor.  While the general relationships between weather and food supply are obvious, our analyses go further than just projecting potential production and yield ranges, by discussing the supply implications in a holistic global macro perspective.  This includes viewing global commodity balance sheets for the world’s major raw materials through the lens of anticipated production/consumption/export patterns, foreign exchange, and potential weather risk, while placing geography (and geopolitics) at the center of our discussion.

As the food supply chain has evolved into a truly global interconnected system, disruptions in one origin can trigger effects, both physical and financial, which ripple through the markets in real time.  In 2007/08, a fairly rapid price spike caught many off guard, but the market seemingly ‘corrected’ (it actually did not), and many prices were back to their previous range by the end of 2008.  In contrast, the recent rise in food prices which commenced around the middle of 2010 is accompanied by a much higher level of uncertainty, as well as the increased risk for civil unrest.  To be sure, there were plenty of food-related riots in 2008, however, they were largely short-lived and less violent.  However, in recent months, nearly every demonstration from MENA to SE Asia, includes some component frustration and anger over the costs of domestic food staples, and If the recent UN note is a sign of what to expect, things will only get worse in the months to come.

The UN Food and Agriculture Organization (FAO) stated that food prices rose 2.2% in January.  The FAO food price index is comprised of a basket 55 agricultural commodities, and the January index value demonstrated a gain for the eighth consecutive month, climbing to a value of 236, which is the index record since it was created two decades ago.  To add to this, even though crude oil futures are down today after a series of session net-gains, most outlooks are supportive of higher oil prices, which will only add to the uncertainty on the agri side.  Index gains were largely attributable to the rising cost of cereals, meat & dairy.  They noted that sugar was the only monitored commodity that did not exhibit a monthly rise; however, the world is still suffering from a sugar high.  According to FAO economist Abdolreza Abbassian, the chief causes of the price increases are tied to weather impacts and supply disruption.  That is not to say that the seemingly insatiable demand for nearly all raw materials and high oil prices do not help support prices at these levels, but the primary causes of the rise are being blamed primarily on the supply side.   Abbassian went on to say that the "only commodity" that is keeping the world out of a full blown food crisis is rice.

In a talk that I gave at the American Meteorological Society meeting last month, I showed the following slide.  The mid year spike in wheat futures was the result of the market absorbing information surrounding the drought/export embargo from Russia.  A dry La Nina influenced Argentina limited soybean yields.  Lower than expected sugar numbers (India) coupled with flood related losses in Queensland has pushed, and is sustaining, sugar futures above the 30 cent barrier.  And there are numerous others.  With the well documented cotton shortage, do growers now plant more cotton collecting the cotton premium which is likely to be priced into that market for much of the year, or do they shift acreage to corn where demand from the food and fuel side remain strong.  As the 2011 weather/crop relationship takes on heightened importance ahead of the Northern Hemisphere summer planting season, agriculture will likely remain among the largest drivers of global economic activity throughout 2011.

The market is currently paying close attention to the dry conditions across much of the North China Plain.  As noted earlier in the week, the most severely affected regions (Shandong & Henan provinces) have received some rain to alleviate some of the short term worries of growers, but we believe that their winter wheat crop will still be negatively affected by three factors: (1) ongoing dryness and a slow transition to favorable conditions, (2) cold winter temperatures and (3) a lack of winter snow cover; the latter two factors have left the winter crop unprotected during dormancy, and this will likely negatively affect yields.  Turning to sugar, we also discussed earlier that while many analysts have been anticipating a shift to net surplus status regarding the global supply situation, our view is somewhat less optimistic than most consensus estimates.  While agreement in the market tends to converge around a number of +1.3 to +1.5 mmt for the 2010/11 (Oct/Sep) year (down from earlier projections in the +2.5 to +3.0 mmt range), the International Sugar Organization (ISO) recently issued a revision to their supply outlook, adjusting their expectation for the 2010/11 crop to +196,000 mt; this is also down significantly from their 1.3 mmt number from November 2010.  Keeping in mind the margin of potential error on these forecasts, 2010/11 could easily remain in deficit for the current marketing year.  Further, there is still the potential for poor weather over the next couple of months to negatively impact cane devoted to the next (2011/12) season, so at this stage, we are viewing a potential break-even point in the sugar market to take place in the 2011/12 crop year. 

So with speculation surrounding additional outbreaks of food-inflation related demonstrations on the rise, and the prospect for continued strength in the oil sector is coupled with a weak $USD, support for an extended period of higher prices in this sector in the agriculture space is likely.

Please feel free to contact us if there are any additional questions, or if you wish to discuss in more detail.

The recent proliferation of articles discussing a deficit in the global sugar balance should not be news.  The market awareness of a potential supply shortage that has given another constructive surge to the raw sugar market is most recently being connected to Tropical Cyclone Yasi, which made landfall last week, and tracked through the cane growing regions on northern Australia (see image from the Courier Mail below).

As we noted in a recent distribution to our clients, the track of TC Yasi has likely caused significant damage to Australia’s cane crop, leaving growers with up to 50% less cane than what they had anticipated before the system ripped apart their fields. As Yasi progressed through the northeast Australian fields, March10 raw sugar futures surged to 36 cents/lb., which is a 30 year high; the contract has since retreated back to the 33 cent range. This event-driven reduction for Australian growers, which some are now placing at around 300K mmt,comes on top of previously reduced crop expectations (~500K mmt) as a result of the flooding in Dec/Jan. With many analysts now calling for a shift to a global supply surplus for the 2011/12 crop year (Oct/Sep), we are cautioning readers to be aware of the risks that can be embedded in these numbers. Note that the International Sugar Organization and several other sugar analysts have reduced their surplus expectations for 2011/12 in recent months from numbers in the +3-4 mmt range down to the +1-1.5 mmt range. Further weather disruptions at any large/medium origins could easily push this down to the negative side of the S-D balance. For this reason, the pattern for Brazil and the 2011 Indian Monsoon will carry significant importance in the coming months.

We are seeing continued strength across the grain/oilseed sector with soybeans leading the way, crossing and staying above the14 mark. All the primary sectors here trading well above the 200 day moving average, and with supply concerns mounting, the market seems to be locked in this bullish channel, which is likely to remain in place over the short term. With strong soybean demand, corn stocks and the stock-to-use ratio both at near 30-year lows and anticipated increasing demand from both the food and fuel sectors, we are maintaining a constructive view on the complex through February. Any weather events (such as recent floods in Australia) will serve to support stronger upside moves in the coming weeks.

The FAO has also highlighted the potential increases in food-related riots, some of which have been seen in Tunisia and Egypt over the last couple of weeks; such events will add to near term volatility and increases in long positions among funds.

Tight stocks in the US cotton market coupled with a heightened awareness of potential weather risks due to La Nina at the start of 2011 signal incereased volatility for traders and manufacturers in the months ahead.  We talked about some of the effects on commercial agriculture stemming from the current La Nina in a post last week, and cotton will be a key commodity to keep on the radar, at least through the first half of the year.  The USDA table below shows says it all…despite a rebound in world cotton production in 2010/11 over the 2009/10 crop year (115.5 MM bales v. 101.5 MM bales), the US domestic Stocks-to-Use ratio is now under 10%; this measure of market tightness was above 50% just a few years ago.

(source: USDA)

 (source: ino.com)

The chart above shows the March2011 contract reaching a high of nearly $1.60/# in late December; it has since retreated back to the $1.40-$1.50 range, which is still a significant rise over what manufacturers were expecting when planning their spend in 2011.  Although global consumption is down slightly from last year, demand for fiber remains strong and we so anticipate this support to remain in place during a slow but steady recovery (China has increased the y/y import quota by more than 33% for 2011).

Prospective acreage will also come into the equation in spring.  According to a recent Financial Times article, the USDA is estimating that the mid year stocks-to-use ratio for US corn will be around 5.5%, the lowest in 15 years.  The potential for low corn stocks supporting prices may have some growers who would be planting cotton this year diverting a portion of their acres to corn, expecting a premium in this tight market.  This scenario has the potential to further exacerbate the cotton situation, and these high prices in the $1.20+ range could be sticking around for awhile. 

With the expectations that a tight S-D balance will remain in place and that cotton futures will likely be in a firm market, higher sustained prices will start to cut into the margins of manufacturers who hold a significant cotton exposure.  Even if additional US acres are devoted to cotton (at this stage this is unclear), it is unlikely that the added production volumes will put enough physical supply on the exportable world market to keep up with rising (or sustained) demand, so we are advising clients to look for opportunities to enter positions using the cotton hedge as a base.  Fiber-based manufacturing companies who have an active hedging and risk management strategy in place are likely to fare better during this period; those who are less proactive may start to see negative results with a clear impact on earnings. 

The Agricultural Outlook Americas conference was held in Boston this week.  This year’s event brought together a mix of growers, investors and technologists, with discussions ranging from  new investments on the farm to currency hedges.  The three day event contained too many interesting discussion points to cover in a single article, so I will address only the highlights here, with follow-up related to some of the focused discussions in future columns.  On the first day of talks, much of the focus was decidedly LATAM, with a recurring theme addressing a potential land bubble across all of the Americas.  With the ag commodity futures markets as volatile as they have been lately, readers should note that the focus was weighted towards investment opportunities with a slightly longer time horizon, and the focus started out with an emphasis on farmland acquisition opportunities, and how to view potential exits with a multiyear, or even multi-decade holding period.  Many of the discussed opportunities always seemed to always point back to Brazil, but difficulties associated with foreign investment in land assets were noted.  Investing directly in agribusiness holdings with strong financials and/or targeted ETFs may provide the easiest access as a starting point (CZZ, BRXX, BRAQ).  In one panel in particular, each panelist was asked about a potential bubble in agricultural investment (primarily land), the response was a resounding no.  But it is important to remember that agricultural land is still essentially a real estate play, and the forces of supply and demand are still at work.  We all know the statistics that support the premise that intensification of agricultural production will be absolutely necessary if we are planning to adequately feed the growing population in the coming decades (there are an expected additional 1 billion mouths to feed over the next few decades).  Intensification, while replete with drawbacks, also implies that the rate of growth regarding agricultural land expansion may level off.  Additional acres to support more mouths notwithstanding, the speculation on support for increasing land prices was not, in my opinion, provided with adequate support.

One point that was underscored, was that a tremendous amount of emphasis is anticipated to go into Brazil and Africa, with, at least in the minds of the majority of speakers, a less bullish stance on expansion in China and India.  While this may not be much of a surprise to most, what I truly did find surprising was the lack of mention, anywhere, of India.  There are well known difficulties associated with foreign investment in land in India, but there are still investment vehicles that provide an investor exposure to this rising asset class.  Indian infrastructure companies can be tied to port and road construction, irrigation and water development, among other variables, and there are numerous ETFs that can allow the individual investor to capitalize on these markets (INXX, PIN).  As the week went on, discussions started to focus on more strategic investment themes for the sector; the usual suspects (population growth, EM growth, protein demand, etc.) tended to contain the broad themes, supplemented with country specific projections that tended to focus on targeted crop expansion and technological innovations.  Regarding the innovation theme, there was an interesting observation.  The global agricultural community, which is a collage comprised of big agribiz (think Cargill & ADM), family farms in Mato Grosso, bankers/hedge funds (many of which have no clue how things grow), and everything in between.  As I do much of my work at the first link in the global supply chain, I attend numerous events like this each year.  When working with such a diverse group, it is often difficult to achieve consensus on anything, and particular reverence is often displayed towards new technologies.  This is very notable among the grower community, whose farms and farming techniques are often passed down through generations, just like a watch or a wedding ring.  After expecting the usual pessimism regarding cooperation (and there was plenty), the common thread that seemed to permeate all discussions which led to consensus, was data.

The innovations in agriculture that grab most headlines are usually related to new seed varieties or physical infrastructure related to increased efficiencies in drip irrigation.  So after one panel session comprised of investors looking for opportunities in both hemispheres of the Americas, I asked about the ‘non-tangible’ innovations that often fly under the radar – those that require not much more than access to large databases, data manipulation creativity, and computational resources.  And after the panel agreed that these are the next generation of agricultural investments, nearly every following discussion seemed to touch upon this theme.  The nice thing about quantifiable data is that this can come from subjective sources, as well as those repeatedly tested in a laboratory.  Given a long enough time series, a grower’s logbook for instance, containing such information as to how a particular crop might respond to a particular weather pattern, the amount and type of pest fighting application that may have been used, and local market offers, all can be assembled into an index, which is another quantifiable data stream that users may have at their disposal.  And while upon first glance one might suppose that these are closely guarded secrets, growers are probably one of the most supportive advocates of open access and data sharing, as what wiped out your neighbors crop a decade ago, may be the very thing that hits you this year.  The potential for collaboration was evident to everyone.  Looking ahead, I expect numerous high quality/high margin products to come to market which have their ‘roots’ in both the acquisition of new types of agricultural data (ranging from genomic to planetary weather), as well as in the repackaging existing data in an effort to (a) widen producer’s margins, and (b) provide transparency on crop conditions, so changes in USDA crop yield estimates for instance (see below) do not come as a surprise and shock the market as we have seen in recent weeks.  

As expected for a multi-day event, as the final day approached, a thinner audience resulted, but this certainly proved to be one more conducive for discussion and debate.  The last day’s discussions were moderated by Roger Berry (C Change Investments), who proved to be the most effective in both steering conversations to the interests of the audience, as well as generating more discussion among participants.  It was good to finally see some environmental/biodiversity and true acute crop related issues discussed on day 3.  As talks focused on the market today, the discussions were framed with some some history, which is absolutely important to understand if we are going to plan for the next 50 years with population movements and agricultural intensification.  Berry even mentioned climate change and water limitations as decision points in investment decisions, which is oftentimes an afterthought to investors.  Also, the new colonialism was mentioned, as a changing dynamic in the global supply chain.  Not the usual talk at an agricultural conference. 

The keynote speaker on the last day was the one who I wanted to hear the most: Dr Gerald Bange of the World Agricultural Outlook Board which is the group responsible for the WASDE, always eagerly awaited every month by traders and analysts.  Here were Dr. Bange’s main discussion points:

• In his focus on C-S-W.  In the WASDE, Bunge acknowledges limitations, particularly regarding supply-side estimates. 
• He addressed Russia wheat crisis this summer.  Russia is exporting 18-20 mmt less than last year, and they only reason they were able to export 3mmt this year in light of the export ban was due to prior commitments
• Russian wheat imports also surged
• He highlighted importance of acute weather events, and the role they play in volatility in futures.
• He also said this type of weather event happens in russia every several years (it doesn’t).
• Regarding the US corn crop and USDA’s significant revision downward on estimates, he notes that the US corn yield this year is not BAD (ie., not far from trend), just lower than previous expectations.  *This is exactly what we told clients throughout the entire season this year.
• Looking forward, shorter crop coupled with early harvest places his agency’s corn price estimate for the (2010/11) year at $5.20, with ending stocks moving down.  USDA expects $7 corn for the same period.
• Ethanol: Oct production running at a record high.  There is a 14 bln gallon capacity – this may be enough as US gasoline consumption is not increasing.  Ethanol producers making around 28 cents/gallon, so there is an incentive to keep producing.

All in all, the week provided a very fruitful conference which provided food for thought on the train ride back to New York.  Feel free to contact me if you would like to discuss any of the items discussed above in more detail.

Corn futures are trading at a 2 year high with analysts becoming more concerned about tight carryover stocks into 2011.  While harvest progress this season has been favorable, mid crop weather conditions limited crop development, which was underscored by USDA’s significant revision (4% downward) on the crop size in mid October.  In addition to low stocks, demand both domestically and overseas is still anticipated to remain strong, so most indicators are looking at tight stocks for the start of the year.  While this year’s US corn crop will still be healthy, weather did limit development during July and August.  The first two maps below show the July and August year-over-year maximum temperatures, with the primary corn and soybean growing counties highlighted.  Max temperatures for much of this crucial period were higher than last year, and in some cases, significantly higher.  This served to limit yield potential, particularly during periods when evening temperatures stayed high, not giving plants enough time to rest as part of a healthy diurnal cycle. 

In addition, acute weather events such as the flooding in key counties in Iowa resulted in lost acreage for some growers.  The bar graph below shows how the Weather Trends long range forecast for the y/y pattern was presented to clients before planting.  It shows that our seasonal outlook called for warmer y/y temps for most of the Jul/Aug period (noted by the bars), and the dashed line (observations) shows that this forecast verified. 

As we approach the end of the calendar year, tightness in the market is expected to remain, and any short term weather shock is therefore likely to cause spikes in futures.  While corn carry over is the issue discussed here, problems with the short US cotton crop and global concerns around wheat stocks will make planting conditions in 2011 a very important milestone for 2011 prices.  Acreage will likely shift, and conditions during the planting window will set the stage for 2011/12 price levels. 

Feel free to contact Weather Trends to discuss our long range outlooks, and how they figure into global crop potential for 2011.