Spring crop price rally running out of steam

The rally in wheat and canola prices of the past two months has run out of momentum and values might start to fall.

Future price direction will likely be influenced by familiar factors: weather and energy markets.

Part of the spring run up in wheat was fuelled by drought in the American southern Plains where hard red winter wheat is grown. Reduced seeded acreage in the United States also played a part. These factors led the U.S. Department of Agriculture to forecast the smallest all wheat production since 1972.

Rain has finally arrived in the southern Plains. It likely came too late to make a significant upturn in production forecasts, but it halted the yield decline for now.

The rain will also be a blessing for cattle producers in the region who have struggled with dry pastures for years, contributing to the beef shortage that has driven grocery prices higher.

Dry pastures were threatening to again derail beef herd rebuilding.

Farther north, the Canadian Prairies and U.S. northern Plains just experienced an intense spring heat wave.

The warm, dry weather helped producers in northern areas get crop seeded after a wet and cold early spring, but the heat was a stress in those areas with crops germinating and in early development, especially in areas with poor spring moisture south of the TransCanada Highway and in west-central Alberta.

As I wrote this, the forecast for the last day of May and June 1 was for welcome rainfall in much of Alberta,

It is too early to say how all this will affect final production as there is a lot of growing season until we get to harvest.

At the same time as the Prairie heat wave, much of western Europe was also sizzling with record high temperatures for this time of year

Dry weather in Europe already had forecasters trimming their production assessments and the end of May heat might cause a further trimming, but so far the outlooks are for crops close to average but down from last year’s above average harvest.

The grain trade would get a lot more nervous if the huge corn and soybean crops in the American Midwest were in weather danger, but so far things look good.

Corn planting and emergence pace is a little ahead of normal and soybean seeding is well ahead of average.

The forecast for early June in the Midwest looks a little dry and so crops will be looking for moisture by mid month.

China is harvesting its winter wheat crop now and there is no indication of significant problems.

Overall though, the weather threats that exist around the world appear insufficient to push crop prices higher and so values could moderate lower unless events outside the grain sector spark a fire.

Turning to energy markets, the war in the Persian Gulf and the mostly closed Strait of Hormuz have pushed oil prices up near the U.S. $100 per barrel level for much of the spring.

The situation changes daily but on the American Memorial Day weekend there appeared to be the best progress so far on getting an agreement on conditions needed to create a stable ceasefire that could lead to negotiations to end the war.

Crude oil future moderated a little, however by May 26 things were uncertain again with the U.S. bombing targets in Iran and crude rose again.

As I wrote two weeks ago, the reduced flow of Middle East oil into the rest of the world has the potential to become a greater crisis in June as reserves become exhausted.

Iran was allowing a few more tankers through the strait in recent days, but that is not enough supply to make a significant difference.

The market appears reluctant to move the global benchmark Brent crude much above $100, where it has been for most of the spring.

That $100 level has supported vegetable oil prices, including canola oil.

Canola crushing margins are very attractive, the highest ever, leading to the April crush total being a record for that month.

If hopes for a peace deal with Iran completely fall apart, then there is the possibility of higher crude oil prices that could further support canola oil and canola seed.

But domestic political pressure is mounting on U.S. President Donald Trump to get a deal to get the oil flowing and lower fuel prices before the run up to the mid term Congressional election this fall.

Meanwhile, Iran’s leaders are embolden by their ability to control the strait and are pushing hard for a deal positive for them and embarrassing for the U.S.

Even so, it seems there is growing momentum toward the parties getting some sort of deal, but it will likely be a bumpy ride.