Too Early to Talk Weather?
What’s Happened…
Dry weather continues to engulf most of the U.S., with winter moisture levels well below normal while temperatures have remained above normal. Those who have farmed for several decades are suggesting it feels much like 1988 and 2012. In those years, a warmer and drier winter led to a warmer and drier spring, and eventually drought conditions during the growing season. In both years, crops were substantially reduced from earlier expectations. Subsoils are depleted in parts of the Midwest; the latest U.S. Drought Monitor map indicates many key crop-producing states are either abnormally dry or in a moderate/severe/extreme drought. (The U.S. Drought Monitor is updated each Thursday and produced through a partnership among the National Drought Mitigation Center at the University of Nebraska-Lincoln, the United States Department of Agriculture, and the National Oceanic and Atmospheric Administration.) With that in mind, it doesn’t take a vivid imagination to wonder what might happen if current weather conditions continue. Add to that the reality of outside temperatures 20° above normal in mid-March. This all makes it difficult to talk about anything except weather.
Why is this important…
With weather conditions hinting that it could be a difficult growing season, end users should be perceptive that this winter’s price sell-off in the corn, wheat, and oil seed markets may have provided an excellent buying opportunity for longer-term needs. While supplies in the near term appear ample, any perception of a smaller crop could send prices significantly higher. Managed money has been record-short futures in the corn market and very short the soybean and wheat markets (from historical perspectives). This suggests that, if managed money does exit or perhaps even goes long, there could be a fast rally. It is not out of line to ask questions and prepare for a scenario where prices reflect legitimate weather concerns.
Though crops surprised most everyone last year with yields that were better than anticipated (given challenging growing conditions), it should also be recognized that rains were timely and, for many, a good subsoil base into the growing season was helpful. July temperatures and rainfalls were more favorable for growing conditions than in June, helping to pull the crop through. It is also important to be aware of what may lie ahead for row crop farmers. In a period in which the market has been steadily downward for nearly two years, the idea of selling aggressively into a rally is appealing. Still, you should be prepared for prices to move higher than expected.
What can you do?
End users could consider forward contracting feed needs and use call options to cover what you don’t want to lock into a forward contract. A combination of the two not only fixes risk; with the use of call options, you leave the downside open for a better cash buy price, on the chance the longer-term downtrend continues. For producers, it is important to sell rallies and keep yourself in a balanced marketing position. Consider buying call options against forward sales. You could even buy calls before you sell and set price targets so that if there is a rally, your targets are triggered and re-ownership is already in place. Be prepared to purchase put options for expected production you do not intend to forward sell.
The bottom line for both buyers and sellers is preparation. Have conversations with your advisor to put you in a position to shift risk and take advantage of opportunities.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
Author
Bryan Doherty