Market Strategy: Anatomy of a Weather Market

August 3, 2016 02:52 AM
 
corn_July

This year, June and July gave market volatility a whole new meaning. Intra-day trading ranges of a dime in corn proved fairly common, and soybeans saw 40¢ to 50¢ ranges. 

Soybeans began their rally on March 1, and corn on April 1, on continued deterioration of the soybean and corn crops in South America. Ironically, both topped in June. 

Where We’ve Been. Weather markets usually discount worse-case production in about six to seven weeks of price discovery. The scenario created the urgency to price significant 2016 corn and soybean production in cash-forward contracts, fortunately within pennies of that high move. That high priced in a corn yield of about 165 bu. per acre well ahead of any yield-threatening weather. 

I used a positive technical analysis to resist selling rallies during the first six months of 2016. Because I used technical analysis to lift hedges in March, I looked for a technical signal to sell, as well. The high in corn came the week of June 14—about 11 months after the July 17 weekly high this past year and six weeks after this year’s weather market began April 1. Corn failed to hold above the high posted July 2015. Corn and soybeans gave technical signals to pass off price risk to the buyer. 

Stress Test. Having said all this, I hate weather markets. Getting up at 1:30 a.m. to listen to the Brexit vote in England is one thing, but bucking the trend of selling too early and then selling at the epitome of dry-weather hype, was not in my life’s plan. Although rewarding, managing price risk is not easy.  I’ve spent precious heartbeats in the past eight months, and I haven’t harvested the crop. No one promised success comes easily.

Good News Points. At July low prices, we were not discouraging demand for anything. You should be more optimistic than some believe.

  • South America will think twice. There is a lot one can do with $3 cash corn. The signal we are sending South America might give them pause in November as they consider expansion. Global soybean demand suggests the extra bushels are needed to prevent a sub-200-million-bushel carryout in 2016/17. 
  • Weather market could extend into next year. Weather experts are rumored to be concerned more for 2017 than they were for this year, as La Niña can affect global production for an extended time.
  • Early frost potential lingers. An early frost rarely  materializes. Yet cool Canadian air prevented the heat dome from moving too far east and brought rains.
  • Bins enable elevator-like sales. On-farm storage has increased enough that producers don’t have to sell crops off of the combine, especially with another likely Agriculture Risk Coverage (ARC) payment. 
  • Soybean outlook remains bullish. Most think South America will meet underlying global demand for 2017 soybeans. If not—Katy, bar the door to the upside for protein. The massive, technically positive, weekly bull flag forming in soybeans means I’ll want to re-own my crop if indicators suggest it’s prudent.

If you want a look at the soybean chart with my technical outlook, email me at smsjgulke@aol.com.

 

Corn From The Top Down
TP_038_T16119
The value of December 2016 corn futures headed lower in June after topping out near $4.50. It marked the end of a month-and-a-half-long weather market.

 

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