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Weather market continues

07/16/2012 @ 11:09am

No question we’re in a full-blown weather market. The question is, however, when will it flame out? Good question, indeed.

The simple answer is either when it starts raining or when the crops are completely dead, whichever comes first.

While weather forecasts are always fluctuating, we usually only have to wait for a day to see if they verify. But during a production season, those few days can make or break a crop. We are quickly approaching that time window for corn and soybeans. And frankly, for many regions, those days are already behind us for the corn crop.

But, there is still that pocket of the upper Midwest which has managed to hang in there with the corn crop – getting enough rain to keep yield potential respectable. But those days are dwindling as well, and the forecast’s call for heat and little rain could send those areas into a similar situation as the eastern Midwest.

For soybeans, there is still time for rains to save the day. But that time window is also quickly closing. Longer range forecasts seem to be consistent with an El Nino developing that would bring rains to the Midwest – but when? Late July might be early enough for some regions to save the soybeans crop, but likely not for the far southern regions.

What if those rains don’t come until August, or later? Obviously, that would be a big problem and soybeans don’t have substitute options like corn does like pulling wheat into the feed channel or just reducing ethanol grind. 

So, while soybeans have already rallied in response to weather, if these hot and dry conditions continue for another couple of weeks they could see even a much more explosive rally. If the rains come, down we go?

Weather markets are brutal, regardless of what side of the market you’re on. There are clearly sellers who are willing to step in front of this market and take their shots at the short side. So far, they’ve managed to stop the rally, as scattered thunderstorms keep giving them ammunition. But can they continue to hold the market in check if general soaking rains don’t come soon? My answer would be likely not, but when the radar keeps showing at least some rains, it’s hard to keep the upward momentum.

It appears to me, judging from the forecasts for the next couple of weeks, that there is more crop damage coming and scattered thunderstorms simply won’t be enough to stop the deterioration. Certainly, at some point the market will top out, and it will likely be sooner rather than later – most likely by the end of July. However, for now, I expect markets to continue higher and we’ll look for the accelerating price moves (which normally involve limit moves) and blow off price action as signals for a top.

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