Weather markets are never easy. I no longer worry about my hair turning gray, however, as a result of one of these markets. My hair is all going to fall out first.
Emotions run high for everyone involved in weather markets. Emotions are different, however, depending on whether you have a crop or not. Producers with dramatic yield losses are obviously going to have more serious concerns than producers who have large yields and are just worried about where to sell the crop.
By the time you read this, I'm going to assume the weather market of 2005 has been completed.
Where To From Here?
That's the key question on everyone's mind. Emotionally, I think everyone needs to go through a recovery period after so many ups and downs. Those who are most emotionally drained are obviously producers who didn't grow a crop. Hopefully, they had crop insurance. But that only provides partial help. Other producers are emotionally drained from margin calls, concerns over forward cash contracts that were made too early, etc.
Nevertheless, history does tell us something about weather markets. Here are some characteristics that may be of assistance to you over the next few months:
Weather markets (supply driven) always peak early and have a long tail.
Weather markets peak when the news is the most bullish and the supply shortage most obvious.
Weather markets always swing too high on the upside as bullish enthusiasms results in speculative buying.
Price recovery after a supply-driven bull market takes a considerable amount of time.
That said, think back to the bull markets of 1988 and 1996. Bear markets that lasted not just months, but years, followed both.
Granted, every bear market is splattered with rallies — and sometimes significant price recoveries — but not back to the peaks that were established during the heat of the battle.
As this goes to press, USDA is forecasting an average price in corn for this coming year of $1.70-2.10/bu. at the farm and soybeans in a wide range from $5.10-6.10. Take the middle of both of these ranges and the average in corn is $1.90 and soybeans $5.60.
The first drop in prices should take both corn and beans at least to these price levels, possibly lower. The lower the market goes before harvest this year the higher it will go after harvest.
Mark Twain once said, “If you have to swallow a frog, don't look at it very long.” Weather markets are frog-swallowing markets. Decisions need to be made quickly because prices go down much faster than they go up.
The Driving Forces
It's always important to look at markets and at least attempt to recognize the driving forces that will impact prices over the next month or two as well as the long term.
Clearly, the driving force in both corn and soybeans for the last few months has been weather. Second on the list for corn has been the large available supplies of old-crop corn that were LDP'd early. The number two factor in soybeans is the large speculative long position held by commodity funds. Obviously, both of these factors are negative price ingredients.
However, both factors should result in early preharvest price bottoms. The bottom in corn this year will not be caused by large movements of new crop, it will be caused by large movements of old crop. That translates into not only an early bottom, but the widest basis of the year occurring before harvest starts. You should then see prices recover in both the basis and future levels after harvest is complete.
I anticipate the pattern in soybeans will be similar. Unlike corn, soybeans are still faced with only modest carryover supplies. Thus, you can continue to expect volatile markets and significant price swings in both directions once the news starts concentrating on the South American crop.
Weather markets offer tremendous marketing opportunities for those willing to pull the trigger. This one offered opportunities to sell December 2006 corn above $2.60/bu. and November 2006 soybeans at more than $7/bu. (by selling July 2006 and rolling to November).
Subscribers to The Brock Report were advised to do so on 50% of the 2006 corn crop and 30% of the 2006 bean crop. Some of the best marketing opportunities are often available by looking more than a year in advance. This year was likely one of them.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.