(MarketWatch) – A searing Midwestern drought can send corn and soybean futures into the stratosphere. Too much rain, however, makes for a much more complicated situation.
That is the position farmers and grain traders find themselves after spring and summer rains delayed planting of both crops across the eastern half of the Corn Belt and then continued to soak the region into early July. The Corn Belt is the corn-producing region encompassing western Ohio, Indiana, Illinois, Iowa, Missouri, eastern Kansas, eastern Nebraska and southern Minnesota.
“When you have a market that’s dealing with a wet weather problem, the trade generally has much more difficulty getting its arms around the extent of that problem,” said Dale Durcholz, senior market analyst at AgriVisor in Bloomington, Ill.
The damage from hot, dry weather is readily visible. The damage from excessive moisture, however, is harder to gauge, Durcholz noted. While extremely soggy or drowned out areas can look rough, the actual impact on yields can vary from field to field—or even within the same field.
Corn futures spiked higher in late June as concerns over wet weather finally kicked in. On the Chicago Board of Trade, December corn futures CZ5, -1.10% a proxy for the new crop currently in the field, zoomed from a June closing low of $3.69 a bushel to $4.39 by July 14—a jump of nearly 21%.
It was a similar but slightly less dramatic story for November soybean futures SX5, +0.19% which jumped from $9.04 a bushel on June 15 to a closing high of $10.37 on June 30—a 14.7% rally.
Expectations for better weather and solid crop conditions across much of the region have seen corn and soybean futures hand back the majority of those gains, with December corn closing at $3.855 a bushel Tuesday, while November soybeans settled at $9.4475 a bushel.
The retreat reflects expectations that wet weather will still make for an above-trend crop. The growing season, however, is far from over, which could still make for some more weather-inspired trading before the growing season is complete.
How wet is it?
Heavy rains inundated portions of the Midwest from May through the first half of July. Ken Kleinschmidt, who farms around 1,500 acres near Emden in central Illinois, told MarketWatch that he saw more than 19 inches of rainfall in June alone.
“Nobody around here can remember having that much rainfall in one month,” he said. “It’s kind of amazing. Three years ago we had record drought, now we have record rainfall.”
The wet weather pattern that’s soaked Kleinschmidt’s fields held sway over much of the eastern Corn Belt—western Ohio, Indiana and Illinois—as well as parts of eastern Missouri.
In June, that area saw more than 200% of normal precipitation, according to the National Weather Service. Illinois, typically the nation’s second-largest producer of both corn and soybeans, saw the wettest June since the government began collecting data 121 years ago. Indiana and Ohio also set June rainfall records.
“The storm track was just lined up to carry a lot of significant storm systems up through the Plains and then out through the eastern part of the Midwest,” said meteorologist David Streit, founder and chief operating officer at Commodity Weather Group in Washington.
Meteorologists say the above-normal rainfall in the Midwest might be tied to the El Niño weather phenomenon, which is marked by warmer sea-surface temperatures across the central and east-central Pacific Ocean.
Regardless of the cause, the recent retreat by corn prices reflects ideas that despite the unfavorable conditions in substantial portions of the eastern Corn Belt, the crop elsewhere will more than make up for it. After all, the saying “rain makes grain” is a favorite adage of futures traders. While some farmers are undoubtedly hurting, above-average but manageable moisture elsewhere is expected to enhance crop production.
Everybody talks about the weather
Jitters over weather and the outlook for the crop are inevitable and pop up nearly every year. At some point, a hot, dry spell or worries over planting delays or an early frost will spook market participants, pushing grain futures higher on fears the potential crop will shrink.
Later, if the weather changes, those fears can give way to relief, sending prices down as market participants add bushels back to the crop.
Recently, market participants have been adding some bushels back to both crops as weather shows signs of moderating and conditions across much of the Corn Belt, even including those heaviest hit by rain, aren’t especially troubling. Moreover, crops in the western portion of the Corn Belt, including Iowa and Minnesota, look excellent.
There is still much to play for, however. Most of the Midwest’s corn crop is now in or completing the pollination phase, the most crucial yield-determining phase of growth. Crunchtime for soybeans typically comes in August when the flowering and pod filling stages occur.
That means it is too early to say with great confidence that corn or soybean prices have peaked, analysts said.
“You can backtrack. It’s not too late in the season to take back bushels” if conditions take a turn for the worse, said John Kleist, chief strategist at EbotTrading.com in Lakemoor, Ill.
Corn and soybean futures can get particularly volatile if adverse conditions persist. Devastating drought years are seared into the minds of producers and traders alike. Significant bouts of hot, dry weather sent corn and soybean prices soaring most recently in 2012.
Alongside 2012, the 1988 drought was the most devastating in recent decades, resulting in a corn crop that was nearly 28% smaller than initially expected. Droughts reduced the corn crop by more than 10% in 1970, 1974, 1983, 2002 and 2012.
1993
Devastating wet-weather years are harder to come by.
“They’re so rare,” said Agrivisor’s Durcholz. “I’ve been doing this 40 years now, and the only other one I can think of off the top of my head is 1993. They just don’t happen often.”
The Great Flood 1993 does offer some loose comparisons. The destruction that year was more high-profile. In contrast to this year, the heaviest rains in 1993 fell in the central and western Corn Belt, causing massive flooding along the Mississippi River and its tributaries.
The corn crop that year was around 20% smaller than projected.
The flooding and wet weather in 1993, however, was also accompanied by hot, dry weather across much of the Southeast U.S.
So far, 2015 isn’t shaping up to be another 1993. Damage to U.S. corn and soybean crops appears relatively limited. The burden of proof might now rest with the bulls to prove the crops are in danger, analysts said. History shows above-normal moisture and a lack of extreme heat historically point to above-average crops, said Elwynn Taylor, agricultural meteorology professor at Iowa State University.
Soybean prices might be more sensitive over the remainder of the growing season. August weather will be closely watched, and it is also less clear how many acres of soybeans went unplanted—a factor that will become clearer later in the year as the government compiles more crop data.
It’s important to remember that in weather markets, participants are focusing almost solely on the supply side of the supply-and-demand equation.
Once market participants have a grip on the supply outlook, attention then shifts back to demand, Kleist said. It’s worth noting that throughout the rally, foreign buyers of U.S. corn never panicked, he said, and instead curtailed buying as prices rose.
At the same time, relatively tight supplies of corn and soybeans could limit downside until traders have a better grip on crop size, Durcholz said.
Kleinschmidt was cautiously upbeat about crop prospects. His corn is largely on schedule, while his soybeans are only slightly behind. A break from the wet weather in mid-July was a welcome relief that allowed fields to dry out and it appears that pollination has gone well in the area, he said.
Worries remain, however. The wet weather has left the corn crop with a shallow root system that won’t serve it well if weather turns hot and dry, Kleinschmidt said. A return to wet weather, on the other hand, would trigger concerns about harvest beginning in September.
