Thursday, June 4, 2009

Ag: Wheat Up, Going Higher (Blame El Nino)

The futures were recently up 1 1/2% at $6.27.
When talking about this, remember the distinction between El Nino 'conditions', which is a positive anomaly of .5 degree or greater in the Nino 3.4 zone of the Pacific and an El Nino, which is the same anomaly but recorded in three rolling three-month periods i.e. five consecutive months. By the time of an official El Nino call the bulk of the move is usually behind you.
From Bloomberg:
Wheat Futures Climb on Concern Drought May Curb Global Supply
Wheat futures climbed in Chicago after falling the most since January yesterday, as drought in Argentina and the increased threat of the El Nino weather phenomenon raised concern global supply may drop.

The Buenos Aires Cereals Exchange yesterday lowered its estimate of wheat planting in drought-hit Argentina, South America’s largest exporter of the grain, to 3.2 million hectares (7.9 million acres), from a May 27 estimate of 3.7 million hectares. The likelihood of El Nino conditions developing this year is probably greater than 50 percent, Australia’s Bureau of Meteorology said yesterday.

“When you’re dealing with Mother Nature, that could have devastating effects on crops,” Peter McGuire, managing director of Commodity Warrants Australia Pty, said by phone today. “If the output is down, then you’ll probably see a little bit higher wheat prices.”

Wheat for July delivery gained 1.5 percent to $6.27 a bushel in electronic trading on the Chicago Board of Trade at 1:09 p.m. Paris time. The most-active contract plunged 7.8 percent yesterday, the steepest decline since Jan. 12.

“It’s enough for the market to start doubting the economic recovery, for the dollar to rally or oil to drop, and operators start cashing in part of their long positions in commodities,” Paris-based agriculture consultant Agritel said in a market comment....MORE

Reuters had the El Nino story last week:

El Nino odds rising with warming Pacific

The chances of a 2009 El Nino, a warming of eastern Pacific waters that often brings drought to Australia's farmlands, has risen and is above a 20 percent probability, the Australian Bureau of Meteorology said on Thursday.

International climate models are now predicting a warming of the Pacific Ocean," said the bureau.

"The average of the forecasts from each of these five models predict El Nino conditions being established by the southern spring, and by mid-winter in four of them," said the bureau in its latest report.

"With this higher predictability and better agreement between the forecasts, the probability of the development of an El Nino event in 2009 is now much higher than one month ago and it is significantly higher than the climatological probability of about 20 percent."

The possibility of a drier spring could reduce estimates of Australia's 2009/10 wheat crop, now being planted....

...Scientists have linked El Nino events in the Pacific Ocean with Australian droughts. El Nino occurs when the eastern Pacific Ocean heats up, with warmer, moist weather moving toward the east, leaving drier weather in the western Pacific and Australia.

La Nina occurs when the eastern Pacific Ocean cools, leaving the western Pacific warmer and increasing the chance of wetter conditions over Australia.

Bloomberg had a longer story yesterday:

El Nino Risk Is Increasing, Australian Bureau Says (Update3)

...The odds are now likely to be greater than 50 percent, more than double the normal risk in any year, the bureau said today in a statement. An El Nino may be established by mid-winter in the southern hemisphere, the statement said. That’s about July.

A repeat of severe El Nino weather conditions experienced from the Philippines to Australia in 2002 may curb farm output in Asia, possibly hurting harvests of rice, palm oil, coffee and cocoa. It may also harm Australia’s wheat crop, helping support a rally that sent wheat futures to an eight-month high this week.

“When the full effects come in, you’re looking at a wheat crop of less than half” the average of 22 million metric tons a year in Australia, said Ben Barber, a broker at Bell Commodities Ltd. Australia will be the world’s fourth-biggest exporter of wheat in 2009, according to the U.S. Department of Agriculture.

Wheat futures in Chicago gained 22 percent in the two months through yesterday, and on June 1 traded at $6.77 a bushel, the highest since Oct. 2. Wheat for delivery in July traded at $6.6425 a bushel at 4:26 p.m. in Singapore...MORE

Here's the longer term anomaly chart, from Climate Observations:
NINO3.4 SST Anomaly
Monthly Change = +0.446 deg C

We'll have more on this as it develops. Here's our March 27 post that gave us the heads up

La Nina Update March 26, 2009

...Based on current information, the ENSO is weakening toward the borderline of neutral. [from La Nina i.e. getting warmer]...

...We'll follow up next week with the implications for hurricane development and landfalls, crop yields and June weddings....