Is an El Nino on the way?
Actually, markets are more preoccupied currently with cold
temperatures, and whether they will cause any crop damage in the former Soviet
Union and, in particular, the US.
Even if an El Nino, linked to warm Pacific ocean
temperatures, is in the offing, it will be months off.
But the threat of the weather pattern - which typically
causes dryness in Australia, some of the South East Asia palm oil belt and India,
and potentially in parts of South America too (bringing other bits heavy rains)
– is blipping on investors' radar.
'May approach El Nino
The catalyst has been a caution from the Australian Bureau
of Meteorology that while current conditions are neutral as regards El Nino or
La Nina (linked to cool Pacific temperatures, and also disruptive to
agriculture), some models predict that water temperatures "may approach El Nino
thresholds by early winter".
(That is early winter from a southern hemisphere
"Model outlooks that span autumn have lower skill than
forecasts made at other times of the year, hence long-range model outlooks
should be used cautiously at this time," the bureau added.
Nonetheless, the forecast made waves with the likes of CHS
Hedging, which noted that "this type of [El Nino] pattern hasn't been seen in
the Pacific since 2009".
OK, Luke Mathews at Commonwealth Bank of Australia noted
that the bureau estimated that "the chance of El Nino is still very low and
that most of their models suggest that 'neutral' conditions will persist this
But it also has to be noted that official US forecasters
earlier this month have also cautioned over the increasing threat of El Nino.
"While current forecast probabilities are still greatest for
ENSO-neutral during [northern hemisphere] summer, there is an increasing chance
for the development of El Nino," they said, ENSO being a key indicator of the
At Texas A&M University, Mark Welch also flagged the "increasing
chance" of an El Nino.
Still, for now, the US cold temperatures were more of a
concern to investors, largely in terms of whether winter wheat seedlings are
being damaged, or obliterated.
Commodity Weather Group has said that the cold snap may damage
as much as 10% of the Plains crop and 2% of that in the southern Midwest.
At Phillip Futures, Vanessa Tan said: "According to
agricultural meteorologists, current harsh temperatures would probably affect
5-10% of the US winter wheat crop."
CBA's Luke Mathews noted that while "extremely cold
temperatures in the US are causing more damage to the winter wheat crop, this
is yet to translate into significant price support".
'Sharp rally' ahead?
And this despite signs of strong demand too, as an extra
"However, ample supplies means this demand has had little
impact on prices," Mr Mathews said, if flagging the threat that "the
combination of robust demand, freeze concerns and short covering could lead to
a sharp rally in prices" at some point.
Wheat for March stood down 0.4% at $5.63 ½ a bushel in Chicago
as of 09:30 UK time (03:30 Chicago time).
Brian Henry at Benson Quinn Commodities said that US temperatures
"will moderate into the weekend.
"The winterkill issue will likely become more of a back
burner item, but will still draw mention until more is known."
The US cold is also an issue in terms of logistics, meaning
that some buyers are having to pay up for short-term supplies – a factor seen,
for example, as having helped underpin corn
Furthermore, "the Ukraine is currently facing similar
logistics issues as cold weather there is reportedly causing export delays,"
Benson Quinn Commodities noted.
Phillip Futures' Ms Tan said that corn deliveries from Ukraine
had "stalled upon harshly cold conditions", prompting importers "to buy from other
countries such as the US".
Indeed, in the US, CHS Hedging noted that "CIF values for
corn popped above $0.80 a bushel over the March futures contract for the first
time in a while, as demand seems to be building in the Gulf for corn".
'Ethanol margins shrinking'
However, there is a limit to the potential for corn price
rises, given the huge US harvest, and the impact of resilient values, coupled
with falling ethanol prices, on margins for biofuels groups.
"Ethanol margins continue to shrink as logistics, light
farmer selling, and weaker ethanol markets have ethanol producers feeling the
results," CHS noted.
Chicago corn for March eased 0.2% to $4.31 a bushel,
remaining trapped below its 75-day moving average, but above 10-day, 20-day and
Oats in demand
One grain for which the North American cold is continuing to
lift values is oats, for which the
March contract soared a further 2.0% to $4.25 a bushel in Chicago, an eight-month
high for a spot contract – and up 20% so far in 2014.
As Canadian farm officials have noted, "US end users and market
trading funds have consistently bid up the nearby futures month to encourage
delivery," thanks to logistical problems squeezing oats availability.
At Iowa-based broker Market 1, Mike Mawdsley said that, "March
oats just might catch or surpass corn before the contract expires," on March 14.
"Who knows, maybe oats will rally up to wheat prices."
Price strength might in fact encourage extra plantings come
"If this trend continues, and if July (new crop) oats could
get to $4.25-4.50 a bushel or higher, some producers may throw a few acres of
oats in the mix," he said.
"Of course most haven't/can't remember how/or wouldn't want
to bale the straw."
As for soybeans, these
followed the main Chicago grains lower, easing 0.1% to $12.84 a bushel for
March delivery, undermined by a generally benign outlook for South American
weather and by the prospect of China's new year holidays beginning on Friday.
This is expected to sideline the world's biggest importer,
depressing demand, if only temporarily.
Still, will they be buying Brazilian soybeans when they return?
"The bullish impact of surprisingly high US soybean exports
tightening projected mid-season and ending US soybean stocks was been overshadowed
to a great extent by the imminent movement of soybeans from Brazil, where early
harvest has started, into usage channels," Anne Frick at Jefferies Bache said.
In fact, Brazilian soybean exports "do not usually reach
critical mass until March", Ms Frick said.
The record shipments for a February are 1.568m tonnes, set
two years ago.
For a March, the record is 4.237m tonnes, also in 2012.
"Argentine's harvest is about two months later, delaying the
first large export month for soybeans from Argentina until April or May," she
That is, of course, if producers are selling them rather
than holding on, using crops as a hedge against a falling currency and soaring
Argentine farmers are estimated to be hoarding 8.4m tonnes of
soybeans, compared with 1.6m tonnes a year ago.
* Further to the International Cocoa Organization statement late
on Tuesday on its deficit estimates, cocoa
futures indeed proved relatively resilient in early deals, as some investors had forecast, falling by 0.6% to
$2,889 a tonne in New York, and to £1,823 a tonne in London, both for March