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Typical weather rally?

Agriculture.com Staff 06/22/2007 @ 8:30am

This year is looking like it will be a typical year, when it comes to the performance of the grain markets during a weather rally. Weather market rallies follow patterns that make it difficult to sell into, even when prices are higher when one would expect based on supply and demand fundamentals.

The closer to Chicago the weather problem, the sooner the market bids risk premium into the price. It can be dry in Nebraska for several weeks and the market takes little notice. When it is dry in Illinois and Indiana, as it was this year, the market anticipated reduced production before any real damage was done. There is still time for dryness to reduce crop yields in almost any part of the Midwest, so prices will be sensitive to what the weather does as opposed to anticipation of plant stress.

Weather rallies typically go straight up and straight down. Usually they go down faster than they went up. Those conditions certainly could describe the current situation. It is difficult for a farmer with tens or hundreds of thousands of dollar invested in a crop to see why prices drop as severely as they did this week when the rainfall was spotty and crop conditions took one of the biggest nose dives in history in Monday’s report. The fact is that the recent market was not driven by real demand or real shortages, but by the psychology of what might happen. Therefore, when conditions appeared to be changing, the attitude of traders changed even faster.

Many times a weather rally will end a few days before the weather problem goes away. That seems to be the case this year, with prices at the end of this week dropping in anticipation of rainfall over the coming weekend. I have experienced this frustration many times in my farming career. Prices drop before the needed rain comes. If we get the predicted rain this weekend, the market will be proven right, as it usually is. If the rainfall fails to materialize, the excitement is not over yet. With hotter and drier weather predicted for next week and the fundamentals still bullish, do not be surprised if we see another attempt at new highs before the summer is over.

If the highs on Monday were the highs for the summer, the top of the weather rally will have been five days earlier than the 28-year average. The average date for the top is June 25. That is pretty close considering how much fundamental factors have varied over that long of a time period. It again proves the value of the seasonal charts as guidelines for knowing when to make sales. They are certainly not perfect. They are better than shooting in the dark!

Crops look really good in my area and most of eastern Nebraska. We have not had rain since June 2, but three weeks of dry weather is not unusual for us. The time without rain let us get caught up with spraying, haying, etc. Not far from me, there was a storm last week that left as much as three inches of rain, so we are all in pretty good shape.

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