The Chicago grains market's wild ride of the last few weeks may be a recurring theme this year, especially given the weather outlook for the summer growing season.
Corn and soybean futures have rallied sharply over the past month, with the most significant gains coming last week, particularly for soybeans. Funds took on bullish positions late last month and have expanded the net long position in CBOT soybeans to the largest volume since mid-2014 (reut.rs/246ZALH).
Although this is typically the time of year when money starts flowing back in to agricultural commodities, money movement alone cannot be the only explanation for a rally of this magnitude, especially in such a well-supplied market. There are other contributing factors including currency, exports, and crude oil prices, but the rally seems to defy the market's underlying fundamentals.
What is becoming more apparent is how much of a weather market exists at present. It has been almost four years since a significant weather-related supply issue has arisen on a global scale, and the anticipation is mounting for possible weather disruptions in this year’s crop cycle.
Among all the factors behind the recent rally, weather has largely been in the driver’s seat. Given the expectations that La Niña could bring drought to the United States this summer, weather will likely keep spurring market anxiety more than usual in the coming months.
April showers bring...
This month has been filled with weather volatility in North and South America that has dominated the market sentiment of late.
Worries that wet conditions would delay U.S. spring planting began earlier this year, but the wintry start to April followed by a sudden shift to summer-like weather has led to uncertainties over the acreage split between corn and soybeans.
At the same time, weather snags have been plaguing South America. Argentina’s soybean crop has been pounded by heavy rains, which have raised concerns over losses associated with wetness and harvest delays. Although the forecast has sharply dried out, industry views on how much volume will be lost are still highly variable (reut.rs/246ToDq).
After over-exporting its first-crop corn, Brazil is relying on a good harvest of second-crop corn, known as safrinha, to boost domestic supply, but drought conditions have tormented the main crop areas. As in Argentina, industry estimates of losses are broad, but they may expand as significant relief is not imminent for the affected areas.
There were even dryness concerns earlier this month for the U.S. wheat crop, which is in some of the best shape in recent years, as potential drought indicators began to pop up across the Plains. Recent rains have curbed anxiety, but perhaps market participants had begun to wonder, “Is this the start of the drought I was told to expect?”
The ride is far from over
There is still a good deal of time left for the current weather woes to linger. Argentina is unlikely to conclude its soybean harvest until late June, the same time that Brazil’s safrinha harvest begins. The latter harvest will run through August.
In the United States, corn and soybean acreage can be implied only very loosely by weekly planting progress reports at this time. Firm answers on what has been planted will not arrive until the U.S. Department of Agriculture releases its annual June acreage report on June 30 (reut.rs/246SZ3O).
But the market stir over South America and U.S. acreage perhaps pales compared with what is often one of the most hotly contested items, U.S. crop yields. The debate could be particularly elevated this year since forecasters have been warning for months that the impending La Niña cycle in the Pacific Ocean could bring drought conditions to the United States.
Clarity on yield is also several months out. In a normal year, U.S. corn yield can start being assessed in July while soybean yield is best gauged in August. That leaves a lot of time for weather forecasts to change, both in the short and long term.
This means that any newly issued weather forecasts between now and August that indicate potential for any prolonged heat or dryness could cause more market freak-out than usual, as traders will wonder whether this is the start of “the Big One.”
The market has had its own “drought” of sorts in recent times with relatively subdued grain prices, meaning that over-reactions could be more frequent. But market participants who have a better handle on the weather situation will be much better poised to make profitable bets, this year more than usual.