Commentary: Wet and cool, hot and dry - Both bullish for grains in current market

by Ron Sterk
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Futures traders have been in a quandary as opposite weather patterns both have been bullish for grain prices in the current highly sensitive weather market. On any given day, or even within a single daily trading session, forecasts for either wet and cool or hot and dry conditions have sent prices skyward.

The futures market tends to react to weather forecasts and sometimes rumors as much if not more than to actual weather events or fact. Sometimes it’s right and sometimes it’s wrong.

An example of what some would call incorrect market reaction, although not weather related, occurred the past couple of weeks in New York frozen concentrated orange juice futures where prices shot to nearly four month highs. News that the Asian citrus psyllid was found in Mexico, two miles from California’s major citrus growing areas, contributed to a sharp rise in futures prices. The psyllid carries citrus greening disease, which kills citrus trees and some said it could wipe out up to 25% of California’s orange groves in a couple of years. The only thing is, few California oranges are used to make juice, most go to the fresh market. Florida produces the vast majority of U.S. orange juice and has been taking measures to control citrus greening for years with little overall impact on prices, which have generally been depressed because of slack demand.

For corn and soybean crops, forecasts for continued cool wet weather are worrisome to the market because already late planted crops will develop slower, pushing the time for critical pollination or pod setting later into the summer when hotter, drier weather that could reduce yield potential is more likely. Later developing crops also are more susceptible to an early frost. Heavy rains in already saturated areas may cause more flooding when it is too late to replant, resulting in increased abandoned acres and lower production.

Hot dry weather now, as opposed to later in the summer, is a concern because young crops in wet soils have shallow root systems and less tolerance to heat.

Both scenarios have been cited as moving markets in recent days.

Meanwhile, actual crops growing in farmers’ fields, unlike paper trading in Chicago, appear to be improving based on the most recent U.S. Department of Agriculture and state weather and crop bulletins. "Corn and soybean crops continued to recover from past weeks’ excessive rain and flooding," the Iowa field office of the U.S.D.A. said in its June 30 crop update.

The good to excellent condition rating for corn in the 18 major states bottomed at 57% as of June 15 and improved to 61% as of June 29.

Futures markets will remain volatile during a weather market, but might not always reflect what actually is going on in the country. Much like record high crude oil futures prices have not been representative of large crude oil stocks or easing demand for diesel and gasoline in the U.S., or like orange juice futures prices that are rising even as demand is limping along and a potentially large 2008-09 Florida orange crop is developing, perception sometimes translates to reality in the market.



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