For the last three months, the feed crop market script has read in the following way: With back-to-back South American and US droughts, we are fated to endure two quarters of record corn and soy prices. But with high prices encouraging an expansion of Brazilian and Argentine planted area and a forming El Nino promising a rainy, fruitful Latin growing season, it was assumed that supplies would recover and prices fall off by the second quarter of next year.

 

But one of the two assumptions behind this optimism is now becoming shakier. After warming up like a lion, the El Nino conditions off South America are turning into a lamb: Instead of rising further, ocean temperatures have leveled out and are showing signs of falling. After enjoying near record rainfalls in parts of Brazil and Argentina in mid summer, critical corn and soy growing regions like Brazil's Mato Grosso province have gone a month without rain.

 

-If a real El Nino was forming, things should have turned noticeably wetter, not arid. The Australian Bureau of Meteorology noted that, "Indicators such as the trade winds and tropical cloud patterns have yet to show typical El Nino signatures." Instead of an assured wet South American growing season, Australia's Bureau of Meteorology, values close to, or greater than, typical El Nino thresholds" return "to neutral towards the end of 2012 or early 2013."

 

While neutral conditions would not be a supply-side disaster (only a third consecutive La Nina would be), they would result in a smaller than expected crop at a time when two years of bumper harvests are needed to restock the world's feed crop bins. That could set back the market's expected price softening from early 2013 to mid year, at the very least.