Porto Alegre, May 30, 2023 – The market again shows its direct connection with the climate variable and points out that estimating crops with high productivity before confirmation by the weather is quite delicate. The CBOT prices moved more aggressively last week because May will still close with below-normal rainfall in the central-east section of the US Midwest. The picture is expected to improve in June, however, the moment hits the market in an oversold position in which any spark starts a fire.
The planting of the US crop continues at an accelerated pace and with confidence in high productivity this year. Until last week, 81% of the cultivated area were complete, against 75% of the five-year average, and 72% of the normal average. But the crop is not defined at planting, therefore, we have at least seventy days of weather ahead, in which the market will carry out its traditional volatility based on short-term weather events.
And this movement started early this year, already in this planting period. May was already being signaled by forecasters as a drier period this year, which is one of the reasons for the planting to be advancing so quickly. In 2022, the drought reached the western side of the Midwest and brought production losses, however, it is a region that came from two years of drought and that persisted last year. This year, it is the region with more rain this spring. The east side has a May with enough rainfall for planting, but with Indiana and Ohio not following the pace of the other states. Both states are planting within the five-year average. So, in terms of planting, there is nothing wrong that could leverage prices.
From now on, however, the rain will control germination and initial development. This end of May will still have below-normal rainfall in this eastern axis, with the environment improving from the first week of June. Germination reached 52% of the planted area, against 45% of the average, with Indiana and Ohio being above average. Illinois and Iowa, the top two producers, with 68% and 65%, respectively, are well above average. For now, there is nothing to point out as bad for the US crop.
So why did prices go up last week? For the last 15 days, it has been raining below normal, and there will be another week of little rain. The market has brought back memories of 2012, when the arrival of spring allowed for very early planting, and the rains stopped in mid-June. For the time being, there is no map showing this trend of less rain in June, much less for the peak of the US summer. However, the market wants to price the climate in the simplest way: with rain, prices fall, without rain, prices rise. With seventy days yet to define the 2023 season, there will still be strong weather-induced volatility.
Another reason is that the market is oversold. Highly leveraged funds and producers hold positions against lows on the exchange. When the market positions itself excessively on one side, any contrary situation causes large reversal movements. Any spark can start a fire. And that is what happened last week, without the crop still being fully threatened. Keeping an eye on the weather is of paramount importance to this short-term external volatility.
Follow the Safras Agency on our website. Also follow us on our Instagram and Twitter and stay on top of the main agribusiness news!