Current water vapor satellite is showing less activity in more weak activity & this supports the JulAug dryness that the Weather Trends long range forecast had predicted for this period.  With tight physical supply, this is constructive for #11 futures.

Looking at current Monsoon activity, the IMD weekly update noted that the past week has seen drier conditions across central and western India; regarding sugarcane development, the low precipitation activity across Maharashtra (the largest producing state) may be a cause for concern when projecting physical balances this year.  The seasonal rainfall map to date for the 2011 Monsoon season is shown below.

 Refer to the Weather Trends weekly forecasts to see how the Monsoon is progressing.

The above graphic from the Indian Met Department shows the advance of the 2011 Monsoon as compared to typical onset milestone dates.  As we can see by the progression as of 29-30 May, as well as on the inset map, the convective activity originating over the southern subcontinent has been developing favorably, and new plantings in the (sugarcane) growing regions in the southern states of Karnataka & Tamil Nadu are already benefiting from this pattern.  Further, the analysis of satellite-derived vegetation maps are showing an improvement in both plant health and soil moisture over last year as well as the five year average, supporting the view that the 2011 season will be a benefit to 2011/12 output.

This will be important for the coming ‘11/’12 marketing year, as most analyst expectations seem to support a global surplus to fall in around the range of 5.5-7 mmt, which is an increase over the slight positive balance in 2010/11 following two years of net deficit.  In spite of a favorable weather picture for India as well as Brazil in the short term, higher crude oil (currently up) and a weaker dollar (currently down) will serve to limit the downside risk to Jul/Sep #11 futures in the coming weeks. 

Please visit the Weather Trends updates for notes regarding the progression and impacts of the 2011 Monsoon season through September.

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.

In the USDA Foreign Agriculture Service May 2011 World Agricultural Production Report, it was noted that projected corn production in the US for the 2011/12 season is currently at 343.04 mmt, which would be an 8.5% increase over last year.  The increase in planting acres (roughly +1.4 mm ha) is largely responsible for the favorable supply outlook as yields are anticipated to increase only slightly.  Globally, the production balance is estimated by USDA to come in +6.42% higher than last year.  Our summer outlook is hinting at some y/y dryness in the western corn belt in July (see map below), while in the east, we are expecting a favorable pattern.  We have noted in previous columns that numerous analysts are stressing the need for ‘perfect weather’ in order to generate the supply needed to keep pace with corn demand, coming from both the food and fuel sectors.  The current flooding along the southern belt has already delayed crop plantings, and looking at anticipated dryness creeping in during August, we are betting against a perfect summer.

The NASS Crop Production Report from May 11th highlighted the April flooding up an down the Mississippi River.  In addition, the wet (and cool) weather delayed planting of the corn crop which was reflected again by the planted acres status as of May 8th, highlighted in the following table.  The first map below shows the late April y/y precip, and the second underscores the %soil moisture for the same period.  For the top corn growing states, planting progress was 40% complete, vs. 80% this time last year.  It follows that only 7% of corn had emerged by that date, compared to 36% in 2010 and a five year average of 21%

With the longer maturity cycle required for corn, as the planting window begins to narrow, growers may start to be faced with the decision to switch acres to another crop with a shorter growing cycle such as soybeans, but some may also opt for planting cotton and groundnuts, particularly in the southeastern states.  Despite macroeconomic uncertainty, the general outlook is for sustained demand, so after corn futures have been pulled back along with the broader ags/softs commodity complex, the outlook may start to turn constructive in the coming weeks.  In addition, the recent surge in beef and dairy demand will strengthen the feed market in the US.

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.

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 reports that Weather Trends has been issuing regarding the global sugar supply situation has, for several months, been calling for a gradual improvement to the global balance sheet; however, we have always been less optimistic than most consensus estimates regarding the shift to surplus status.  Most agencies had been figuring a number of +1.3 to +1.5 mmt for the 2010/11 (Oct/Sep) year, which is down from earlier projections in the +2.5 to +3.0 mmt range.  The International Sugar Organization (ISO) recently issued a revision to their outlook, placing their expectation for the 2010/11 crop at +196,000 mt, which is down significantly from their 1.3 mmt number from last November.  Given 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.  Recent revisions among the majority of estimates should also serve as verification of the methods that we have developed regarding crop potential at Weather Trends.

Looking ahead, we are expecting a favorable pattern to develop over Brazil’s Centre-South (new cane planting starts in late April), so we  have figured a positive outlook on next year’s crop from the world’s largest origin.  Moving to the second largest producer, it will be very important to monitor the onset and progress of the Indian Monsoon this coming season.  We are expecting that the Monsoon will get off to a healthy start, but there are some signals pointing to the potential for dryness during the July/August period (see map above), particularly in the cane growing belt in the north.  This could serve as a yield limitation, which will be discussed in more detail once we enter the new growing season.

Sugar futures up today:

Overnight activity has the grain/oilseed complex opening on a lower note, with wheat leading the way.  Northeast China has received rainfall over the last few days, bringing some relief to the provinces that have been affected by the recent drought in the region (particularly Shandong and Henan provinces).  While the rains have eased some of the fears of traders in the short term, the longer range pattern still is facing some significant challenges, as it takes more than a few days of rain to end a severe drought.  We are noting that the pattern is showing the potential for improvement in the coming weeks, but there is still a long way to go before we can say that the region is out of danger.  There has already been a likely yield limitation on the current winter wheat crop, which we discussed in last week’s note.  In addition, while our forecast shows improvement, it is a slow improvement, and conditions may not return to a favorable pattern until after planting of the spring corn and wheat crops.  While we may see a brief pullback in the market, we are looking at this as a favorable entry point for July positions.

Dryness across eastern China in recent months is likely to have an acute effect on the current winter wheat crop, and there are also anticipated effects on the coming spring wheat & corn plantings.  The above map from the Foreign Agriculture Service shows that the drought is most severe in Shandong, Hebei and Henan provinces.  These three provinces are among the largest corn producing regions in China; this is also the heart of the wheat growing region.  For most of the North China Plain region, December and January precipitation has been low (see WTI map below of Jan prcp vs. normal), with many key agricultural regions receiving between 20%-40% of their typical seasonal rainfall.  In addition, winter snow cover totals have been low, which in effect removes a layer of protection for dormant crops.

The dry pattern is not expected to break in the short term, so the first impact will be on the winter wheat crop, which will start to come out of dormancy in late March.  We so see some improvement in the extended forecast, but given the severity of the current drought, there will certainly be a lag before vegetation and soils across the affected provinces start to exhibit a positive response.

Chinese agricultural officials have made a recent statement, downplaying the severity of the drought with respect to crop impact.  At this stage, we do not agree with this assessment.  The lack of moisture may take 1-1.5% off of yield expectations for the current winter wheat crop, and there will also be a likely limitation on the spring plantings, which typically commence in early March for wheat, and late March/early April for corn.