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The law of averages

Agriculture.com Staff 04/30/2010 @ 10:49am

It seems, when it comes to weather, one thing the Midwest can count on is the law of averages.

Looking back last fall, conditions were wet in October and in some cases so unfriendly to harvest and fieldwork, that parts of the Corn Belt did not even get their crops harvested, let alone post-harvest fieldwork. Those who were able to get corn harvested yet unable to complete fall fieldwork faced a difficult task if spring weather was anything less than ideal. Well, it appears that the law of averages kicked in. After such a significant and dramatic fall with adverse weather, this spring's weather is almost textbook ideal.

Farmers have the opportunity this spring to catch up on fieldwork and planting progress is almost unbelievable. As of Sunday, April 25, 50% of the corn crop was planted. Obviously, much of this rapid planting progress can be attributed to bigger and better equipment that allows for faster planting. Also, farmers are logistically lining themselves up to make it happen. More importantly though, good weather is needed. As winter wore on, it looked like spring may never come, as much of the Midwest was engulfed in one to two feet of snow in fields and five to six feet of snow in hedgerows and snow banks. Yet, mid-March proved to be warmer than expected with little frost in the ground. Much of the snow disappeared, allowing farmers to begin to scratch the surface of spring fieldwork much sooner than anticipated.

Just to give some perspective as to how rapid the planting progress is this year compared to last year (a wet and cool spring), Illinois was 73% completed with planting this past week versus 4% a year ago and 28% on a five-year average. Indiana showed similar results with 56% of their crop planted this year versus 2% a year ago and 14% on a five-year average. Iowa indicated 68% planted this year versus 41% last year and 23% on a five-year average.

So what does it all mean? In most years, Midwest weather is good enough to produce average to above-average crops. Keep in mind that the last couple of years have seen above-average rainfall and, if one believes in the law of averages, there is probably a year lurking where rainfall will be below average. Although crop varieties are more drought resistant than ever before, it is still critical that timely rains fall throughout the season. We are not forecasting a dry year, yet, if summer weather balances out with less rainfall than each of the last two years, prices may be poised to see a late summer rally.

We encourage both producers and end users to recognize that volatility is alive and well. While prices may be on the decline this spring due to good conditions, that can (and may) rapidly change. The key is to be prepared. Consider covering feed needs with forward contracts and out-of-the-money call options which have gone out of favor lately, losing value as prices have slid. If you have forward sold grain, consider buying out-of-the-money calls to cover these contracts.

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