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Now watch South America's weather

Agriculture.com Staff 12/10/2007 @ 9:27am

BY BRYAN DOHERTY Since becoming a more dominant player in the agricultural world the last 15 years, South American weather has become increasingly important to price for U.S. commodities.

Weather developments can be critical but often overanalyzed. Weather outlooks change constantly, but in most years normal conditions generally prevail. Typically in South America, weather talk starts in early fall. From our perspective, the real weather for making or breaking South American crops begins about the middle of December. With heightened volatility and declining world inventories, this year's weather developments in South America, especially for beans, will be more critical than in past years, affecting where prices may go.

Now that December has arrived, it is time to take a serious look at South American weather. The September/October/November time window is similar to the April/May/early June window for U.S. crops. Fall in the U.S. represents the planting season for the Southern Hemisphere. While dry conditions concern producers in South America, early rain deficit also allows for rapid planting progress. This year South America, especially parts of Brazil, experienced net drying during the planting, which led to some replant. Over the last 4 to 6 weeks, though, Brazilian weather has turned more conducive while Argentina's weather has more concerns.

Looking ahead, we see a growing concern due to a drying pattern in northern Argentina, a key growing area. Current soil moisture conditions are estimated at short to very short in all major grain, oilseed and cotton regions. This, along with a forecast that does not offer much near-term moisture, may affect early planted crops. Late planted crops may not be as affected as much for now but still will need moisture sooner than later.

As for Brazil, the situation does not look as concerning. However, the Southern states are drying fast. The forecast appears, at least as of this writing, to hold better promise for moisture in most major producing regions. As time passes and late December/early January loom closer, weather conditions will be critical for crop development. The market will rapidly reflect weather changes while also digesting a shrinking trend to world projected carry-out.

So how does this affect you as a farmer in America? First of all, expect volatility to remain high into the winter months. Weather in South America could dramatically change the outlook for all U.S. crop prices. If you have aggressively sold, it may prove beneficial to cover these sales with fixed risk option strategies. If you are holding a lot of inventory but want to continue to store, then consider PUT options as safety valves to provide a price floor. As for making additional cash sales, you need to determine when you can deliver as well as your cash flow needs.

Keep in mind if it appears South American weather is in good shape by mid January, price rally potential will probably be limited. Therefore, cash sales are recommended on both old and new crop, especially on price advances into the winter months. Expect normal weather, but also plan strategically for the unexpected weather events in South America this winter.

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