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Trading the 'stall-out'

Traders in the pits in Chicago trade fear, not fact. And, right now, there's a fair amount of fear as to whether the 2011 corn crop will meet the expectations of a year when experts agree farmers need to raise a monster crop.

Now, enter the major players in the grain markets today. The index funds moving the grains today are enormous compared to the ag funds that weighed on the trade in the past, and the longer planting delays linger, the more nervous those funds -- and their positions in the trade -- become.

"They're living and dying by these charts," says grain market analyst Tim Hannagan. "They trade fear, they don't trade fact. I remember when it was $5 to $10 million ag funds trading these. Now, we're talking $10 billion tech funds."

Hannagan was one of a trio of panelists at Thursday morning's Marketeye Roundtable, an event that also featured University of Illinois Extension agronomist Emerson Nafziger and National Weather Service ag meteorologist Steven Rodriguez. Panelists discussed the current weather outlook, both long- and short-term, as well as the agronomic impacts of that forecast and finally, the effects of those agronomic changes on the grain trade.

Looking skyward, the theme that's paced the weather over the last month in much of the Corn Belt looks to continue, Rodriguez says. Though the La Nina pattern -- one that's characterized by wet, cool conditions in the Midwest -- looks to be abating as the summer rolls on, it may be too late to cause enough of a shift in planting conditions to matter.

"La Nina is expected to weaken over the next couple months, which should help things in the long term, but despite this weakening, we anticipate it to last through the next month into June," Rodriguez said Thursday. "Expect to see above-normal precipitation in the areas where we've already had above-normal precipitation." Beyond that, he says the 2-month outlook tends to remain on the cool, damp side in the Midwest and dry and warmer in the Plains.

Agronomic effects

So, what's it mean agronomically? Aside from causing a lot of jumpy nerves and apprehension when the clouds build for a lot of Midwestern farmers, Nafziger says it's really too early to get too worried just yet. That's based on conditions right now, though, and if things continue to stay cool and damp for too much longer, things could unravel quickly.

"It's a stall-out like we really haven't seen before. We can raise a good crop with a late start, but, the chances of that are diminishing. We're hoping still with our fingers crossed...We're hoping we can still get a very good crop,"Nafziger said. "Certainly May 5 is not a late date to plant corn. May 10 or 15 isn't disastrously late.

But as we see these patterns continue, we certainly have some concerns."

And while the rain -- of which more than 20 inches fell in parts of southern Illinois in April -- is taking center stage now, the focus should soon shift to temperatures. "Looking at [growing degree day] accumulations, the crop that was planted up to the 12th or 13th of April should be emerged by now. If it's not coming up, we need to get out and take a look at it," he added. "We've had reports of seedlings showing a chilling effect when water taken up by the seed is cold and those seedlings don't emerge. The other concern is that those put in the first week of April, which generally came up with a nice stand, our GDDs were better for the first half of April. Temperature is becoming a bigger issue moving forward."

Market ramifications

Now, back to Hannagan's point about the traders in Chicago. How much will the current planting weather trend influence the trade moving forward? $8 corn isn't out of the realm of possibility this summer; look for December corn to break past the $6.80 level next week if the poor weather continues, with $7.35 the next price point. On the lower side, "should everything break and the planting window open up," Hannagan says prices shouldn't get below $6 this summer.

No matter which ends of this spectrum prices settle, Hannagan says today's fund-driven trade is following a clear trend.

"These large index funds are trading whatever the next weather report is -- whatever that next weather report says, that's what they're trading," he says. "Late Thursday and Friday, markets are rallying and closing sharply higher. What the funds are doing is buying the next weather forecast...buying ahead of the weekend, so when the electronic trading starts Sunday night, they can trade the price swing. What happens is that the market closes lower on Tuesday and Wednesday on profit-taking, then it starts over again. Then, here we go, on Thursday, moving higher."

And, looking ahead, though corn's hogging the planting spotlight now, don't be surprised to see soybeans become a bigger issue the longer corn planting lags. "Quietly we're already falling woefully behind on soybean planting on the  inability to plant corn, which we want to get planted first," Hannagan says. "Beans might not be the tail of the dog much longer and might break out to the upside."

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