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Home / Futures Blog / South American drought attributed to La Nina hurts crops

South American drought attributed to La Nina hurts crops

December 30, 2010 by Daniels Trading

The east coast of the United States may be blanketed in snow, but in corn, wheat and soyabean fields of Argentina, Brazil and Uruguay, the weather is scorching. A prolonged absence of rain is raising fears that harvests in these key agricultural nations will fall short of expectations, putting further pressure on a global commodity market already strained by Russian, Australian and Pakistani weather conditions.

The price of different grain futures are at their highest levels since the beginning of the 2008 financial crisis, with corn contracts up more than 50 percent in 2010 and soybeans up over 30 percent.

On Tuesday, corn futures for March 2011 delivery were down by 2 and 1/4 cents to 621 and 3/4 cents per bushel. March 2011 soybean futures rose 3/4 cent to $13.77 and 3/4 per bushel, while wheat futures slipped 8 and 1/2 cents to 790 and 3/4 cents per bushel.

Furthermore, futures for some other agricultural products have been buoyed, as hog and cattle farmers anticipate more-expensive feed as the price of corn rises. Live cattle futures were up 0.375 cents to $1.08625 per pound on the Chicago Mercantile Exchange.

"Some farmers haven't had enough rain to put in their second soybean crops and are seeing very poor development of their corn crops," Martin Lorenzo, a subcontractor working in the worst-affected area north of Buenos Aires, Argentina, told the Wall Street Journal.

According to figures reported by the New York financial daily, corn production in the South American nation will fall from 55 million metric tons last year to just 48 million metric tons this year. Quotas on exported corn may also fall.

The tightening supply may also lead to a spiral of prices as investors eye an opportunity to jump in on a booming commodity trade. However, futures investors and hedge funds have largely been cleared of accusations that they helped stimulate the global food crisis that wracked the globe in 2007 and 2008, financial markets.

Reports have generally suggested that the main cause of rapidly rising prices was the redirection of food to fuel and the simple gap between supply and demand. 

"We think the upcoming year will parallel early 2007 and 2008 when capital was readily flowing to commodities," Richard Feltes, an agricultural commodities analyst with RJ O'Brien, told the Financial Times this week.

Weather analysts believe the hot weather in the Argentine corn-growing regions will continue through the next week. The more it cuts into this critical pollination season, the consultants say, the worse the consequences will be.

Another source of bullish momentum for investors and trepidation for consumers is the rising volatility of crude oil futures. Bloomberg News reported Wednesday that implied volatility for at-the-money oil options rose more than 25 percent in that day's trading.

Rising oil futures will make key inputs for agricultural industries and individual farmers pricier; and volatility will make it harder for those growers to hedge their exposure on the financial markets. 

Overall, it looks like 2011 is going to a pricier year for food: the United Nations Food and Agriculture Organisation's food price index rose above 200 points last month. That's the first time it's broken that level since the global food crisis. 

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

Filed Under: Archived News

About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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