Food Weather Outlook (5/29/08)

Positive supply news continues to drive the agriculture market, exerting constant pressure on sugar and grains futures. July sugar futures continued trading in the bearish channel from Wednesday of last week through Tuesday (US markets were closed Monday), closing below the 10-cent barrier Thursday. The outlook for global stocks remains healthy for the current crop year, and the weather outlook supports favorable cane production across most of the major origins. Cool water across the equatorial Pacific that is characteristic of La Nina continues to erode, and the warm subsurface water now stretches across the entire Nino region.

Both of these factors are signs that the dominant driving pattern is starting to change phase more rapidly; this highlights a major shift in the global pattern that will influence the current cane crop more heavily later this year, and will have significant impacts (positive and negative depending on geography) for next year's cane and beet crops. Part of this transition where we are between La Nina and El Nino can lead to increased rainfall in coastal Queensland and southern China, while we could start to increase the risk of a drier pattern for Brazil's Centre-South developing later this year during southern hemisphere summer (drier than normal and much drier than last year).

Looking at this a little closer, planting and early stage crop development of next year's C-S crop will get off to a favorable start, however the extended outlook into early 2009 does point to the risk of increased dryness which can negatively affect cane development in Brazil. For several months, my view has been consistently bearish on sugar with the recent downward movement even exceeded expectations. In the short term, there may be more downside risk, but as attention turns to the Oct08 and Mar09 contracts, the weather pattern discussed might start to chip away at global production and yield potential, and this could lead to higher support levels after the July contract goes off the board.

In grains news, another week of colder temperatures in the eastern corn and soybean belts in the US will be a negative yield factor for both crops. Another cool week is forecast for the current week, and then expect to see a more normal seasonal pattern resume for the first week in June. The spring pattern pushed all yield potential models to a late plant scenario with delayed emergence, and now attention should be turned to the later portion of the growing season through harvest. The cooler late season forecast is not favorable for boosting yields or extending harvest, so anticipate more volatility in futures in the latter half of the crop.

In South America, western grains regions across much of Cordoba received little or no rain last week, while the east (Santa Fe) received between 10 and 20 mm. The dry weather is helping the corn and soybean (1st crop) harvest, but the shorter 2nd crop may have some yield implications. Given the dry outlook for the next 2-3 weeks, lack of soil moisture in Cordoba could start to become an issue for the next wheat crop.

That said, in spite of recent pullbacks in sugar, corn and soybean futures, the longer range outlook supports a bullish pattern, and the associated ETFs/ETNs (including DBA, FUD and MOO) may follow, so now may be a good entry point. Conversely, PBJ may face some downward pressure, as the high raw material costs continue to eat into margins.

Disclosure: None