Ample grain stocks could dampen impact of El Nino/La Nina shift

Reuters News
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Posted: Feb 01, 2016 12:31 PM

By Mark Weinraub

CHICAGO (Reuters) - When El Nino gives way to its little sister, La Nina, this year, as meteorologists are forecasting, the disruptive weather patterns may still be unable to disperse the bearish clouds that have hung over U.S. grains markets for years.

Corn and soybean futures have gone haywire in past transition years, with prices soaring as yields withered.

But plentiful supplies, both overseas and domestically, should provide a buffer against any disruptions this year and dampen any market rallies.

Traders say the market is not focused on the predicted change in the weather pattern, particularly since the shift to a La Nina, which leads to a cooling of Pacific Ocean temperatures that may bring hot and dry weather to key U.S. growing areas, may even happen too late to affect crop development.

In addition, some meteorologists say the correlation between La Nina and adverse growing conditions has been overstated.

Corn futures have surged an average of 39.4 percent in past transition years, while soybeans have averaged a 31.8 percent spike. In 2010, the last time U.S. farmers faced an El Nino-to-La Nina shift, corn posted a year-on-year gain of 51.7 percent and soybeans rose 34 percent.

(Graphic on corn, soy prices; yields: http://tmsnrt.rs/1PDg3dt)

But farmers, who are hurting from three straight years of falling prices, are not banking on similar gains this year. Most growers are quick to book some sales any time the market shows signs of strength rather than hold out for the prospect of sustained rallies.

"I have not done anything different," said Roger May, a farmer in Oberlin, Kansas, when asked if he would change plans because of a possible La Nina. "My view is to try and stabilize our income ... rather than hit the highs and lows."

The most actively traded Chicago Board of Trade corn futures contract rose 3.7 percent and soybeans gained 2.1 percent in January. Most analysts attribute the gains to bargain buying and short-covering, and rallies have quickly been capped, with dealers on the cash market reporting a pickup in farmer sales of stored grains on brief market spikes.

Some farmers have talked about holding back some of the crops they have kept in storage bins since the harvest as insurance in case the market rallies later in the year, a grain dealer in southern Indiana said. But that has done little to push cash differentials or futures markets higher.

And futures contracts that track the crops that will be harvested in the fall have lagged slightly behind the front-month issues, indicating that the market is not building in expectations of La Nina-related cuts to corn or soy production.

"It is tough to get excited about weather forecasts that are potentially nine months in the future," said Garret Toay, a risk management consultant for brokerage First Choice Commodities.

Corn yields have posted year-on-year declines that average 8.9 percent in the past six years when El Nino was weakening and La Nina was strengthening, based on data going back to 1950 from the National Weather Service's Climate Prediction Center as well as U.S. Department of Agriculture (USDA) records. Soybean yields have fallen an average of 6.5 percent.

Both corn and soy yields fell in four of the six transition years. The biggest declines came in 1988, when farmers saw a 29.4 percent drop in corn yields and a 20.4 percent drop in soybean yields.

The USDA is forecasting both corn and soybean stocks will rise in the 2015/16 crop year, and domestic supplies of both crops stood at record levels as of Dec. 1.

(Reporting by Mark Weinraub; Editing by Jo Winterbottom and Jonathan Oatis)