Still a weather market?

No rain soon means loss of yield, analyst says.

We are midway through August and yet we're still in a full-blown weather market for this year's crops.

If you didn't know any better, the only way you would probably imagine a weather event at this time of year would likely be concerns that a late-planted crop might not do well if a frost were to affect it. This year's crop was planted very timely and for most, until recently, has experienced good growing conditions. Through the full second week of August, 69% of the nation's corn crop is rated good to excellent and 71% of the soybean crop also rated as good to excellent.

So why is weather a concern?

The western regions of the Corn Belt have struggled with pesky dry conditions all year. Timely rains and (at times) hot, yet mostly moderate temperatures have allowed for the crop to get off to one of its better seasons over the last 10 years. Ratings started high and remained as such all summer.

Dry weather continues to be a concern as the affected regions are expanding. This week offers little chance of significant widespread rain.  The epicenter of dry in the Midwest is in central western Iowa, as depicted by NOAA’s United States Drought Monitor map.

The nation’s corn crop is fast approaching maturity, yet due to dry conditions, could lose two to four bushels an acre by the start of harvest if rain doesn’t occur soon. This reduction will have an impact, especially if there is another loss of between 200 and 400 million bushels due to high winds in Iowa and elsewhere. Nonetheless, most farmers feel their corn crop is far enough along that a late-season drought will have minimal impact.

For soybeans, the story is much different.  August can make or break a crop.  A four-bushel-an-acre yield loss in corn is a 2.2% decline in total production. On the other hand, a reduction of four bushels an acre in soybeans is about an 8% loss in total production. A 10-bushel reduction in soybean yield would reduce the crop size by 20%. As you can see, bushel for bushel, the impact or yield loss is more magnified for soybeans.

The soybean market has experienced good demand of late, as China is a steady buyer.  Add in a weaker dollar, and some loss due to wind, and suddenly the supply picture looks much different. The next two to four weeks will be absolutely critical for the bean crop. It boils down to rain (and soon) or no rain.

We suggest purchasing puts to establish a price floor. If rains occur, prices could drop quickly. The put establishes a floor and leaves the topside open for price advance. If you feel you are oversold on soybeans, then purchase call options for retained ownership. Your risk is fixed, so if prices drop, the most you can lose is the premium and commission on your call option. Should prices rally, any forward sold beans can no longer benefit; and the call option has unlimited capacity to gain value if prices advance. Both approaches keep you balanced. You are protecting downside price risk and able to capture upside.

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If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 444.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results

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