Are We Seeing a Weather Premium in the Markets?

June 10, 2016 12:00 PM
Are We Seeing a Weather Premium in the Markets?

As the weekend approaches, most of farm country can expect to see the hottest temperatures of 2016 so far. You can imagine that hot heat has traders thinking about the potential for La Nina and a drought event this summer. That’s why the market has continued to rally, according to Brian Grete, editor of Pro Farmer.

“We’ve seen prices that were already rallying extend their rally,” Grete says. “The market’s paying attention with La Nina in the back of their minds. You get that first heat wave and think maybe this thing will develop into a drought later on, so they’ve started building some weather premium into prices.”

Grete explains weather premium is simply an addition onto prices in the anticipation that weather will trim yields to some degree. “You don’t know how much,” he says, “but the more weather premium they build in, the more confident traders are that yields will be reduced from trendline levels.”   

Some analysts think weather premium has been at play for several weeks, driving the price of corn and soybeans higher. Grete says that in the case of December corn, weather premium kicked in at $4.20 per bushel.

“We gapped above resistance at $4.20,” he says. “At that point, that’s when the corn market decided to start building in weather premium.”

He credits rallying soybean prices and the current large export demand for getting December corn to $4.20.

Why Should You Care?

This could be your chance for profitable sales this year, according to Grete. He says farmers should consider how much weather premium they think the market is willing to add onto the price and what price point  at which they are willing to sell.

“At what price are you willing to say, ‘OK, that’s enough weather premium, and I’m going to make a sale,’?” he asks.  

Grete recommends buying calls if you can get them relatively cheap to leave open upside potential should a drought happen later this season.

Watch this morning's ProFarmer Profit Briefing Below:




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