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Morning markets: weather fears extend rally in grain futures

It hasn't taken long for 2013 also to become associated with weather concerns.

It has brought no break in the pattern of dryness in parts of the US, notably in hard red winter wheat country.

The latest official US drought monitor shows 100% of Oklahoma and 91% of Texas rated "abnormally dry", or worse, plus 95% of the High Plains (including 100% of Kansas, the top wheat-producing state).

Luke Mathews at Commonwealth Bank of Australia highlighted the role of "speculation the US drought will result in tight global [grain] supplies for a second year running" in supporting crop prices.

South America division

Meanwhile, there remain concerns over dryness in parts of Russia too, which the country's Grain Union warned last week had hampered autumn-planted seedlings, and over damage caused by cold weather on crops not protected by a snow blanket.

And South America, which entered the year with a good and improving weather scorecard, as Argentina dried out, is seeing this dryness become of growing concern, and in some areas of southern and northern Brazil too.

Central Brazil rains are turning more severe.

Even if these rains do not damage crops, they will slow harvest, delaying the onset of the supply onto the world market of the soybeans that many buyers are relying on, after disappointing South American and US production last year depleted supplies.

'Super wet pattern'

"The weather model data continues to show tremendous amount of rain coming for large portions of east central central and west central Brazil over the next five days," WxRisk.com said, talking of 3-5 inches of rain for areas including most of major growing state Mato Grosso.

"On the other hand most of south western and south east Brazil into Paraguay and all of central northern and western Argentina remains essentially dry over the next five days.

"This pattern looks like it's going to continue non-stop right through the 11-to-15 day outlook, which will take it into early February," the weather service added.

"The super wet pattern continues with no break whatsoever" in central areas, with Mato Grosso, and parts of Goias, set for a "tremendous amount of rain - again 75% coverage or higher of 2-5 inches.

"And once again, to the south, all of south eastern Brazil including Mato Grosso do Sul in south west Brazil, Paraguay and most of central northern and eastern Argentina stays completely dry."

'Time for Tums'

Mike Mawdsley at Market 1 said that it was "time to get the Tums out again", a reference to heartburn tablets.

"Know what you will do if the market spikes higher on a weather scare."

And as an extra support, a broadly risk-on atmosphere was evident in markets overall, on the Bank of Japan's latest move to ease monetary policy in an effort to counter deflation and boost economic growth.

Shares rose in many Asian markets, adding 0.3% in Hong Kong and 0.1% in Sydney, if easing 0.4% in Tokyo itself, a move considered down to "buy the rumour, sell the fact thinking".

Price rises ahead?

On agricultural commodity markets, Joyce Liu at Phillip Futures said that "the focus for grains today is likely to remain on weather, particularly in Brazil and Argentina".

"Unless relief rain comes by this week" to the dry areas, "we expect corn and soybeans prices to test $7.50 a bushel and $14.50 a bushel respectively by weekend." 

In fact, corn for March added 0.8% to $7.33 a bushel as of 09:20 UK time (03:20 Chicago time), signally breaking through its 75-day moving average, above which it has not closed since October, despite a few attempts.

"The March contract stumbled at the 75-day moving average multiple times" last week, Brian Henry at Benson Quinn Commodities said.

Soybeans for March rose 1.3% to $14.45 a bushel, a little short of their own 75-day moving average, at just under $14.52 a bushel.

'Concerns of an expanding drought'

March wheat, meanwhile, added 0.7% to $7.96 a bushel in Chicago, a one-month high, and representing a recovery of more than 8% from a January 11 low.

"US exports have finally picked up its pace after the commodity fell 17% from its high in early November to price levels that make it more competitive than European wheat exports," Ms Liu said.

"We see further upside to at least $8.10-a-bushel levels before importers seek alternatives.

"The limited supply in world market, together with concerns of an expanding drought in the US wheat belt, underpins prices."

Softs split

Among soft commodities, cotton extended its winning spree on ideas of stronger-than-thought US exports and ideas of weak sowings this year because of the lower prices in 2012-13.

New York's March contract added 0.5% to 78.90 cents a pound, a three-month high.

But raw sugar for March dropped 0.4% to 18.30 cents a pound, weakened by the Brazil rains which, while poor news for the soybean harvest, are improving prospects for cane production, when the crush starts later this year.

However, CBA's Luke Mathews took an upbeat view of Chinese sugar import data on Monday which, while showing buy-ins falling year on year last month, represented a sharp pick-up from the November figure.

"We have long argued that strong Chinese sugar demand remains supportive for medium term prices," he said.

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