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Weather feeds volatility

Agriculture.com Staff 06/19/2013 @ 1:37pm

By Cathy Ekstrand

Just like water ebbs and flows, so do the markets, back and forth. How different the planting season has been this year compared with last year.

In 2012, we had a record planting pace and crop development, only to be stifled and set back by a drought of biblical proportions. In 2013, it seems to rain nearly every day, causing continued delays in planting and concerns over whether some crops will get planted at all.

I sometimes wonder what it would be like to be those people whose livelihood does not depend on weather, who watch the weather reports each day only to determine what to wear. They go about their jobs and their business, and whether it rains or not has little impact on their daily lives. Those of us in agriculture don’t have that luxury. We have no control over the weather and are certainly impacted by it.

It’s not enough that the weather affects our crop production efforts; it complicates our marketing efforts, too.

In an article this winter, I talked about how market advisers seemed to be talking out of both sides of their mouth (It’s not doublespeak: It’s reality). Advisers are bearish on the one hand, should the acres get planted and favorable weather occur causing inventory levels to catapult. And they are bullish on the other hand, should a drought occur leaving stocks tight and causing prices to soar.

Needless to say, we are still in that boat. (No pun intended for those of us with too much water.) The next four to six weeks will be crucial to your marketing efforts.

From mid-June to mid-July, weather becomes more critical than any other time. It will make or break the crop. A few years back (2009) we had another slow, wet planting spring. That year, summer weather cooperated and we ended up with a bumper, record-breaking crop. So preparing for uncertainty is what producers must do every day, both in their production efforts and marketing efforts as well. 

It’s understandable that you may be cautious forward pricing a lot of cash grain, especially since you’ll want to get it planted first. You might consider holding fixed risk hedge strategies through the next few months, which would allow you to establish a price floor and keep the upside open for pricing opportunities.

Keep in mind that in a weather market, prices will be volatile and the trend can change rapidly. It’s the market’s job to set prices based on supply and demand. Most years, the crops eventually get planted and, lo and behold, the yield is there come fall. When that happens, it’s hard to increase demand as prices rally. We may lose some yield and acres, but at some point higher prices choke demand as well – and so prices will yo-yo.

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