The Markets This Week — Weather and Oil

Grain markets continue to be depressed by favourable crop conditions, especially in the U.S. where the corn crop was most recently rated as 76 per cent in good-to-excellent condition while the U.S. soybean crop was rated as 73 per cent G/E. This is the fifth-best and best ratings for mid-June on record. University of Illinois ag economics professor Darrel Good argues that if America’s major growing regions see below average temperatures and ample rainfall this summer, the corn and soybean yield estimates made by the USDA will be too low.

While the crops are starting to emerge and are looking fairly good, the U.S. winter wheat crop being harvested right now remains behind schedule as rain slows access to the field. This is most significant in Kansas (AKA the Wheat State) where only two per cent of the crop has been taken off, compared to 19 per cent five-year average. It’s not that exciting to try to get into the field though when yields are ranging from just eight to 20 bushels an acre and with each additional rainfall, bushel weights are falling. That being said, these same rains are starting to been seen as a possible reason crop conditions could decline due to flooding and water damage in places like Nebraska, Iowa, Minnesota, and South Dakota.

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This in mind, it’s somewhat inevitable that we’ll see crop conditions moving down (from these levels, they also do). The aforementioned increase in rain may be an early indication of an El Nino event moving in. Further, some forecasters are saying that, because of these rains, it’s unlikely that the U.S. Plains will see a drought for a third straight year. However, the Australian Bureau of Meteorology has pushed back its forecast for an El Nino event occurring to September/October. This would bring drier conditions in Asia-Pacific areas and heavier rains in South America. While I’m not expecting crop condition numbers to drop like a rock on adverse weather, but they will likely decrease a bit and it’s true that we still likely have little weather risk priced into the market at this point.

Probably the most positive news for the grain industry this past week was that the Canadian Federal Government approved Enbridge’s Northern Gateway pipeline from the Edmonton-area to Kitimat, British Columbia. It’s not all roses yet though — Enbridge still has to satisfy 209 conditions set out by the government, a task that’s easier said than done. You’re probably asking yourself – why is he talking about oil? What does this have to do with grain? Simply put, this pipeline could carry as a much as 525,000 barrels per day out to the coast. Technically, that’s 525,000 barrels per day that won’t be moved via railroad, which should translate to better availability for grain movement.

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