The joys of a short, sharp weather rally

I took a lot of joy recently in watching the short, sharp rally in wheat futures launched by a U.S. snowstorm.

It was dramatic, with prices gapping higher as soon as the markets opened on Monday, May 1, following the weekend storm. It was like people flipped on their computers, took a sip of coffee, saw a bunch of reports about the storm, spewed their coffee onto their screens and hit the “buy” button. That’s the big green button on the right.

Perhaps that’s a bit too simplistic description of what happened, but also perhaps not too far from the truth. Some people reacted violently on the fundamental news, others speculated that the first type of person would overreact that, some shorts got spooked, some automatic triggers were tripped and added to the buying, and we had a buying party.

The following few days I chatted with a few brokers and analysts, and they were pretty skeptical of the rally, seeing a violent reaction like this as something that was likely to steam off in coming days unless more bad weather arrived. Which it didn’t. And the rally, indeed, evaporated a bit at a time. Now it’s just a memory.

I wrote a column about it for this week’s paper, and you can read it here. In it I argue that farmers can take advantage of weather rallies because they often know more than the part of the market that overreacts. Lots of people in the markets know more than farmers, but lots know less, so if a farmer understands that the world is drowning in wheat (true these days) and that it would take more than one crop disaster to fix things fundamentally (also true) they can see that this sort of rally might be a good time to sell some stored or unpriced new crop wheat. There might be a long term reversal in wheat prices coming – quite a few analysts and traders expect one – but pegging that one will take a lot of skills and luck. But it’s pretty clear that the recent rally was a better time to price than it has been for a long time.

To ground my brain in this subject I called a couple of analysts I like and respect, and they gave me some nice nutshell views that I’ll share here, ones that sum up weather market rallies better than I could do:

“It always depends on what the story is and what you’re seeing,” said Angie Setzer, the Vice President of Grain for Midwest U.S. grain company Citizens LLC, pointing out how weather news needs to continue if a weather rally is going to continue.

And she said that all the new funds and trading systems haven’t eliminated the ability of the market to react violently to weather developments, because many of the people around those piles of money are more easily swayed by headlines than long term grain traders.

“We’re seeing a lot of people direct the market and direct trade who may not be 100 percent involved or aware of what’s actually going on in the countryside,” said Setzer. “There’s a lot of folks that are making determinations on whether they’re going to invest in a commodity or not based on what they’re reading.”

Darin Newsom of DTN noted the sharp run-up in prices when uncertainty and confusion attends a significant weather event:

“More often the best opportunity to price a crop is during a weather rally when the least is known about production. The last two summer spikes in corn are a great example. Sometimes one just has to close their eyes, pull the trigger, and hope for the best.”

My entire column could be summed by those two analysts’ views.


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