Farmers might be frustrated when major negative weather events fail to stimulate lasting price rallies, but they should learn to value the opportunities generated by weather rallies that are too good to last.
That’s what we saw with the recent wheat market rally ignited by the snowstorm and heavy rain that hit the southern U.S. Plains and Midwest on the last weekend of April.
Nearby wheat prices immediately shot up with Chicago wheat futures gapping higher at the open May 1 and soaring almost 30 cents per bushel over the next couple of days. Kansas City wheat rose almost 40 cents.
Then the rally faded, and faded, and prices have ground back down to the support zone that has been holding since late 2016. It’s as if the storm never happened.
Farmers who used the weather rally as a chance to price some old crop are no doubt happy.
Those who thought this was finally the big turnaround in the wheat markets are left rueing the lost opportunity, or assuming the real long-term reversal will occur soon.
So what happened here, and how can we hope to identify a lasting rally as opposed to a short-term bit of weather froth?
Every analyst has their own take on the latter question and set of gauges and metrics they use to spot trend changes. That’s a fine art.
But as to the question of what really happened here, there’s not much mystery.
There was a heavy dump of snow and freezing temperatures in the southern Plains, potentially damaging winter wheat crops in a wide area. And there was a bunch of rain in the Midwest, slowing planting progress and flooding some crops that had already been planted.
So there was a real chance that crops in both the southern Plains and much of the Midwest could be worse than had been expected a few days earlier. Crop surveyors a few days after the storm said it was too early to assess the long-term damage, so that added to the uncertainty.
The market initially reacted to the negative uncertainty, pushing prices higher because it was new and dramatic.
However, long-term grain traders weren’t so panicked about the situation. One told me May 1 that “ultimately, it’s all precipitation.… In the end, snow makes grain.”
That same skeptical, wait-and-see attitude was shared by a number of brokers and traders I spoke with following the storm.
After a bit of waiting they saw there wasn’t much follow-up bad weather to exacerbate the impact of the storm.
The bullish effect wore off and traders returned to the familiar narrative of, “the world has too much wheat.”
The market isn’t one thing. It isn’t a single organism. It’s thousands of players all making independent decisions, and that plays a big role in weather market rallies.
A lasting joke is that crop markets will slump if it’s raining in downtown Chicago. That’s because traders can look outside, see rain, assume the same weather applies to the entire Midwest and believe higher yields are coming.
Similar weather in a remote part of Kazakhstan wouldn’t have any such impact.
Such players can drive prices one way or the other for a couple of days before people with different information or ideas can push it another direction if the initial reaction seems overdone.
That’s as true today as it ever has been, regardless of the plethora of speculative funds following algorithms that don’t necessary share all the same concerns as traditional crop market players.
There are all sorts of new players in the crop markets that really don’t understand farming, crops or world agriculture. It’s just another asset class for them. They’re the kind of people who might look out their windows, see rain, snow or scorching sunshine and leap into a position thinking they are witnessing the birth of a lasting trend.
Weather markets are here to stay. We just saw one in action. They’re a great chance for farmers to take some pricing action one way or the other.
It’s just important for farmers to realize that the markets aren’t necessarily smarter than them, and that sometimes the market is a gift horse that shouldn’t be looked in the mouth.