Weather Supportive of a Constructive Agriculture Pattern

The grains complex showed more strength last week. Much of this was driven by news of dryness potentially impacting the South American crops. Most of the moisture problems that we have seen are more prevalent in Argentina’s western growing belt. Further, even in areas where soil moisture and vegetative health are currently healthy, the outlook for the next month is highlighting the potential for crop impacts.

The general outlook in Argentina for the next month is for warmer and drier conditions to dominate, relative to last year’s pattern. This is particularly noteworthy for the corn and soybean crops; corn is transitioning from silking to filling, and beans are in the vegetative to flowering stages – additional moisture and low heat stress are important factors for both crops over the next 30 days. Rains over the weekend may ease some of the pressure in the short term, but the longer term pattern still highlights the potential negative crop impacts, and further reductions to crop potential.

As oil prices fell over the last half of 2008, prices dropped across the ags space in December. Many are demonstrating a constructive pattern and, given the outlook for South America, continued strength could follow as we approach planting in the US. While daily reports seem to focus on the lowering crop expectations at many of the major origins, the possibility for decreased demand outlooks for several major importers is also getting more attention. In addition to monitoring South America, it will be important to track snow cover and the effect on winter grain crops (North America & Europe) that will be coming out of dormancy, as well as spring planting conditions over the next 2-3 months. The WTI long range outlooks can assist in setting these expectations.

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On to sugar, on Monday, the March09 ICE sugar futures contract briefly crossed the 13 cent mark, closing the day at 12.97 (the session’s low was 12.67). Readers who have been following the weekly notes stressing that sub 12 cent sugar was an attractive entry point were well positioned for this recent move. While this is the highest that the nearby has traded since early November, it is difficult to speculate on the directional moves for the rest of the week.

For the last week, traders have been focusing on both supply and demand fundamentals from India, but that is now priced into current futures. We will still focus our analysis on impacts to the supply side, and start to look beyond Brazil and India, focusing on the Thai and Australian crops. Not much precipitation is forecast for Thailand growing regions over the next 7-10 days, while the Queensland belt should see some healthy moisture. Northern Queensland has been receiving beneficial weekly precipitation totals, while the southern regions have been dry, and decreased soil moisture is evident in satellite observations. However, the pattern looks to improve over the coming weeks, and February totals look to be beneficial for the developing crop. For both the current and coming crop years, Australia/Thailand production will become increasingly important to the global balance sheet, along with the expectation for Indian production to scale back.

Given the current activity, the range for fair value March09 sugar is bumped up slightly to the 12.45 to 13.05 cent range, and the view for May09 is now between 12.8 and 13.25 cents.

Disclosure: None.