Mother Nature could trot out the bulls or the bears
The rumblings aren’t difficult to hear. El Niño Southern Oscillation (ENSO) is disintegrating, and La Niña could be on its way. If history is any indicator, a summertime La Niña could bring hot, dry weather with it.
Will that spell r-a-l-l-y? Marketers don’t necessarily agree, but they do agree on one thing—weather is even more important than usual this year.
“If you’re looking for La Niña, look at how quickly El Niño declines,” says Brian Grete, Pro Farmer editor. “The faster it declines, the better the chance we’ll see La Niña this summer.”
Howard Tyllas, a longtime hedger with his own consultancy, says hedging can help cut weather-related risk.
“We do things to add income after the market moves, not bet in one direction,” he says. “If you don’t hedge, you are the gambler and you are betting prices will only go higher.”
Tyllas gives the following example: Keep the first 80¢ upside unhedged, but protect the first 60¢ downside in case the market continues to go down. This costs about 10¢ for the November 2016 contract options.
“What this means, if you did nothing, and the market was 60¢ lower, you’d get 50¢ in your pocket from the protective put spreads,” he says. “But if the market goes up 80¢, you’d still get 70¢ in your pocket.”
For those who didn’t hedge their grain, if the market goes up 80¢, they’re at a 10¢ advantage, but if the market goes down, they’re at a 50¢ disadvantage, Tyllas explains.
Don’t forget weather rallies exist at the expense of yields, warns Farm Journal economist Bob Utterback.
“Beware of what you hope for,” he says. “The odds are very high that if we’re going to see a weather event, it will be like 2012.”
Utterback’s marketing philosophy for 2016 is to sell too early rather than be last and wrong. He is watching South America closely and setting his soybean market strategy accordingly.
“Set a deadline to price at least half of your expected 2016 crop before South America’s harvest,” he says. “Sell the remainder in late June to early July.”
What will eventually play out this summer—weather rally hope or weather rally hype? It’s best to plan for either scenario.
Relying on hope can be a dangerous strategy, but farmers still storing large quantities of grain waiting for better prices have options. Farmers storing grain on-farm will have to check local conditions; extreme stocks and limited demand will hurt basis, says Angie Setzer, grain marketer with Citizens LLC. Farmers who have grain stored at the elevator should probably look to be sellers, she adds.
“Put some lipstick on the pig,” Setzer says. “It might not be great, but it could get worse if the weather situation doesn’t play into your favor.”
Setzer also recommends putting a weather rally into proper context. The current yield trend line for corn is
162 bu. per acre. Dock a few bushels due to bad weather, and there still will be a tremendous carryout, she says.
“A 10 bu. per acre loss could give us $4.50 corn but not $6.50,” she says.
Recognize the difference between marketing 2015 grain versus this season’s crop, Setzer adds.
“Somebody with grain in commercial storage or on a basis contract is not open to gaining more aside from a futures rally that isn’t likely until mid-summer,” she says.
The other major difference is you know your 2015 break-even costs by now, Setzer says. With the new crop, a farmer only has production history and insurance coverage when determining a safe amount to sell.
When it comes time to make a move, will you be ready? That’s what commodities broker Dan Hueber encourages farmers to ponder.
“One of the greatest fears for a producer is they will sell their crop and prices will continue to rise,” he says.
One possible way to address these fears is by purchasing what Hueber refers to as a “courage call” that remains in effect through at least pollination. With those calls in place, Huber says farmers should reward a rally once it has occurred.
Or maybe it’s better to assume there will be no rally? “Our advice for this summer and fall is to respect the trend-line yields and the potential impact of 92 million corn acres on production totals, even with subpar yields,” says Alan Brugler, president, Brugler Marketing and Management.
Meanwhile, two of Brazil’s three major agricultural production regions are getting hit by hot, dry weather during April pollination. “They have a train wreck coming,” says Bill Kirk, CEO of Weather Trends International. Watch for price moves in May and June if Brazil’s harvest is weak, he says.
History Predicts 2016 Corn Yields
University of Illinois ag economists Scott Irwin and Darrel Good looked at historical precedents to see if they could determine the odds of this year’s corn crop going boom or bust.
After determining the 1960 to 2015 yield trend line is stable, Irwin and Good looked at how throwing El Niño in the mix affects those odds. They winnowed down the data set and found in 1972-73, 1982-83 and 1997-98 El Niño’s temperature anomaly was similar to 2015-16, when temps flared 2.3°C above normal. The following corn crop from these three years averaged -4.8 bu. per acre lower than the trend line. But break this data set into the individual years and it really gets interesting: 1973 was 5.5 bu., 1983 was -23 bu. and 1998 was 3 bu.
“This suggests, in conditional terms, about a two-thirds chance of a normal crop in 2016 and a one-third chance of a very poor crop,” Irwin and Good note.
Therefore, based on the 2016 corn yield trend estimate of 166.2 bu. per acre, the range of historically probable yield outcomes swings from 143.2 bu. up to 171.7 bu. per acre.
The ag economists point out another historical weather trend. Extremely wet Midwest conditions in the preceding November and December have a tendency to lead to below-trend yields the following year. November and December precipitation in 2015 were at record levels.
“It is prudent to give serious consideration to managing the elevated risk of below-trend corn yields in 2016, despite the current market structure of prices,” they conclude.