In light of the softer market regarding futures prices, extreme heat across the corn belt this week should add some strength to the sector with widespread warmer temperatures and a drier pattern in the southern belt for several days potentially limiting yields.  With season to date weather now figured into our models coupled with the forecast weather through harvest, the WTI outlook for US corn (18 major states) is for 2011 yield numbers to come in just above trend line (7 year) yields.  We also feel that USDA crop numbers will start to reflect these limitations on the crop. 

this morning’s September chart below

The April weather summary for average temperature and total precipitation (Y/Y) are shown below in the Weather Trends maps, with the primary corn counties shaded.  The pattern does start to look more favorable next week (week of 08 May), so we are expecting planting progress to pick up by mid May.

 In addition to the weather impact to US corn, this pattern also will affect wheat crops for both the US and Canada.  With tight stocks, the weather premium in grains futures can add significantly to the volatility over the next month.

US corn is getting off to a slower start compared to last year; the table above from yesterday’s USDA NASS Crop Progress report shows that planting progress as of April 17th was at 7%, vs. 16% this time last year.  The current week will not help much, but we are looking at better conditions for growers to make up for lost time during the last week in April (see Weather Trends forecast maps below – primary corn regions shaded).

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.

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. 

( map courtesy of IRI/LDEO )

Index values >2 correlate with extremely wet conditions for the particular region.  Droughts often are broken with an extreme pattern in the opposite direction, and while the short term ramifications to the agricultural sector in eastern Australia will see a negative impact in the current crop year, this pattern is likely to have a benefit for the following year(s) as areas that have been moisture deficient will have the ability to recharge soil moisture and groundwater.

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.

Readers of our weekly reports know that, while Weather Trends has been expecting good numbers for US corn production in 2010, our view has not been as optimistic as USDA or most of the other analysts that we follow.  The long range forecast that we developed for the 2010 season was calling for a favorable start (planting through germination), but we did caution that heat stress during mid-crop would serve as a yield inhibitor.  With prices now above 5 (see chart below), some of these concerns that we had voiced are making their way into the market.  The map below highlights the August year-over-year max temperature change (2010 v. 2009), with the primary corn growing regions shaded; this heat (coupled with IA flooding) is now starting to be discussed, and the market is uncertain regarding the directional outlook.

(chart from FinViz).

Beyond our early season forecast which highlighted the potential crop risk, it also is worth noting some of the discussions that we provided our clients with, particularly those from our August newsletters.  Here are a a few samples:

August 2, 2010

"Corn/Soy/Wheat all up strong on Monday morning (+2%, +2% & +4% respectively); weather impacts causing concern both domestically and abroad, with wheat leading most news on the trade wires.  Drought in the FSU is getting most of the attention regarding the wheat spike, while in the US, heat stress may start to become a bigger concern for corn growers.  The US crop did get off to a good start, however we are in the portion of the season where volatility picks up, so there will be an increase in opportunities for weather -event driven strategies to be implemented.event driven strategies to be implemented."

August 9, 2010

"Last week generated some of the highest volatility that was seen in the grains complex in quite some time.  Russian wheat problems continue to cause problems and questions in the futures space, which will be exacerbated by the export ban.  Keeping Russian physicals off of the trade will serve to put a higher premium on supply from US, China and South America.  On the corn and soybean side, the market will only get more pressure from weather this week – as our long range forecast had called for several months ago, in spite of a good start to the season, mid-crop  heat which the Midwest is currently experiencing will lead to heat stress issues, putting a big question mark around final production and yield estimates."

August 23, 2010

"USDA released their corn & soybean estimates last week.  For corn, their yield estimate for the US crop is 165 bu/acre, and their soybean estimate is for yields to come in at 44 bu/acre.  For comparison, the ProFarmerCrop Tour results were also released, and they are putting the 2010 corn yields at 164.1 bu/acre, and soybean yields at 44.9 bu/acre.  The Weather Trends estimate is lower, in large part due to our models figuring in higher susceptibility to heat stress which came in around mid-crop, with more of an impact to corm.  Our current numbers are around 163.2 – 163.8 bu/acre for corn yields, and the soybean yield projection is 42.75 – 43.25 bu/acre."

As of September 22, our most recent estimate for US corn is between 162.9 and 163.1 bu/acre.

Please contact Weather Trends if you would like to learn more about our global commodity/weather services.