Is This the Start of a Weather Rally in the Grains?

The start of the week was a blood bath in the grain markets with soybeans hitting multi-year lows, but growing drought concerns sent markets higher to finish the week.

Dan Basse of AgResource Company describes the start of the week as “macro madness.”

“We saw Chinese PMI come in under 50 and concerns about the Chinese economy, and we were talking about a U.S. recession and not getting a debt bill through,” Basse says. “All of these things kind of collided. And we don’t have any resting orders in the Chicago market either above or below, and because of that, when the selling started, it kind of became a bulldozer trade, which took us to sharply lower levels.”

Basse says while the market’s action was a sharp drop, he thinks the lows that were made on Wednesday will basically hold.

“As I think about the future, we’re now talking about weather,” he adds. “As an analyst, we talked about weather impacting trade Monday night into Tuesday, but that didn’t happen. It waited until Thursday.”

On Thursday, the U.S. drought monitor showed 34% of the corn crop and 28% of the soybean crop are facing drought, as the dryness continues to creep east.

“If you look at this week’s drought monitor, drought exploded across a big swath of the growing region last week,” says Ben Brown, an Extension economist with the University of Missouri. “I anticipate that it’s going to continue to grow. If you look at the weather forecast over the next couple of weeks, or really the whole month of June, that’s going to continue to grow.”

Read More: Drought Tightens Grip Across the Corn Belt, 34% of Corn Now Hit with Drought

Brown says when you look at previous years, there are a few years where the situation is showing a similarity.

“We’re tracking the 2013 and even the 2014 growing seasons somewhat when we look at drought, and it’s growing across the region,” Brown says. “Certainly, the possibility of some strong yields is still there, but we’re starting out kind of in a deficit. I think I can safely say that everybody across the country would certainly take a drink of water right now, maybe outside of the Southern Plains, to help relieve some of that pressure. That’s helping to ignite this rally we’re seeing in the grain markets.”

Basse says traders will be focusing on the weather forecasts over the next few weeks.

“They’re going to be trading the 11-to-15 day — it’s a very volatile forecast,” he explains. “The market will be watching over the coming weeks if the rains will come in time to save the crop.”