Thursday, January 19, 2012

Agriculture Outlook


Talking with some of my former associates, here are some weather/commodity topics that have been discussed over the last few days.

Globally, La Nina conditions have strengthened over the last 30 days, with stronger cold Sea Surface Temperature (SST) anomalies observed across the equatorial Pacific, extending northward along the western coastline of North America. The above map (from NOAA’s Earth System Research Laboratory) shows the extent of the cold mass, which has expanded in both the Northern and Southern Hemispheres since last month’s view.  In addition, the Southern Oscillation Index (SOI) shown below (Australia Bureau of Met) has exhibited a strong shift into positive phase, which is another signal that La Nina conditions will continue to remain in place, even if this is the peak, driving the global pattern over the next few months.


What does this mean for agricultural commodity interests, particularly those in South America? Broadly, the pattern is biased towards more dryness to persist across southern Brazil and northern Argentina. It is still early to say that the current state of dryness in the region, particularly in Argentina, is similar to the severe 2008/09 drought, but most of the signals are pointing towards a lack of moisture for a region that desperately needs rainfall.  In spite of some rain over the past week, the monthly and seasonal profile for this region has been one that depicts a moisture-deficient pattern, and the rain is coming a little too late.  The map below shows Outgoing Longwave Radiation anomalies over the last 30 days, and the positive anomaly values seen over the Centre-South of Brazil and Argentina are indicative of a lack of cloud cover and rainfall.


The short range outlook over the next couple of weeks is for a slightly cooler pattern to materialize in the short range (days 1-5/6), transitioning back to a warm pattern around two weeks from now into early February.  In addition, the precipitation pattern does not look favorable for the remainder of January into February.  The lack of precipitation and elevated temperatures seen in January will have an impact on the Centre-South sugarcane region, and while the market has been looking at a positive physical balance for the 2011/12 crop year, I think that the potential for negative yield impacts for Brazil’s crop in the current and coming crop year (12/13) will add some upside risk to price, even with healthy numbers coming from India and Europe (beet).  For the last few months, while many analysts have been advocating decreasing long positions in sugar, I've viewed this pattern in the C-S as a justification to take the opposite side....the market view might now reflect a change in sentiment.  

For grains & oilseeds, this is also has the potential to be an unfavorable pattern for the corn and soybean crops.  Field reports that I have been receiving have been describing stunted growth for both corn and beans across the C-S (Parana, Rio Grande Do Sul and Sao Paulo states) and even more pronounced negative effects in Argentina (most notably in eastern Cordoba). Weather observations and satellite derived crop indices are supporting these field observations.  Beyond sugarcane, my next concern is for Argentina’s soybeans, as the critical flowering stage will likely be curtailed by the current pattern.

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