Demise of weather rally should have come as no surprise

The market giveth, and the market taketh away.

That’s never more true than with a weather market rally, and we saw that this summer.

Epic saturation in the U.S. corn belt and intense dryness on the Canadian Prairies provoked rallies across the futures and cash markets that are based on the crops grown in those regions. As the saturation and drought worsened, prices escalated.

It was a great time, in hindsight, to be pricing fall 2019 crops.

But then abundant rain came to the Prairies in the nick of time, saving most crops. And most U.S. corn and soybean crops got planted and conditions improved.

Then prices fell. New crop canola futures, which had risen from about $440 per tonne to $480, fell back to $440 by July. Spring wheat futures went from US$5.30 per bushel to $5.90 and back to $5.30 as spring worries worsened and then evaporated.

Corn, the most affected crop in the rally, rose to $4.70 per bushel and has now fallen back to $4.

It was a beautiful example of what a weather market rally can offer and how it can be lost. Above, I used the term “in hindsight” to talk about the lost opportunity to price during the rally, but that isn’t really true. With foresight anyone who expects to be long grain in a few months, including any crop farmer, could expect that the weather market rally would probably lift come July, since they usually do.

Often conditions become better, anxieties fade at least partially, and the worries upon which the increasing prices were based drop off one by one and allow prices to settle back. That’s what happened here and it’s a relatively regular phenomenon in crop markets history.

“It came as scheduled,” said David Derwin, an adviser with P.I. Financial in Winnipeg, with whom I chatted about this subject.

The hope that prices would keep rising would require significantly worsening conditions, since many worst-case scenarios were already baked in to prices by late June. And as prices had risen, crop users had been given a powerful incentive to look elsewhere for crop supplies. The U.S.-China and China-Canada trade spats didn’t help.

Momentum-chasing investment funds might have helped drive prices higher, but when crop conditions improved, they also drove them lower.

Many farmers and others gambled on hopes that (other farmers’) crop conditions would worsen and didn’t lock in fall prices. Perhaps that just seems a reasonable gamble on the bad conditions continuing and extending the rally beyond many traditional early season weather rallies.

But that’s not what crop market history teaches us either, at least from what I’ve seen and studied.

The 2012 U.S. Midwest drought rally was one of the most dramatic rallies we have seen in decades. It taught much.

And one important reality it verified was that even continuing drought does not necessarily support a continuing rally. The experience before 2012 tended to be that continuing drought rallies would peak in early-to-mid-August and then fade. Even if the crop condition worsened and production estimates continued to decline, the rally would end anyway.

That’s exactly what we saw in 2012 and it was no surprise to the seasoned analysts I’d interviewed about the topic during the summer. Some farmers and speculators were befuddled by the inexorable price decline that began in August 2012 and continued for a year, but not those who studied the pattern.

Why does that happen? You don’t really need to know that to benefit from the pattern, but there are some pretty simple explanations: crop users switch to other supplies and products; many buyers have locked down enough supplies to get through the shortage and they leave the market; canny commercial operators begin sensing there’s a better crop out there than the official statistics suggest; and people who know the drought rally pattern begin selling before the market cracks.

This year we got a typical early- season weather market rally, and it resolved as most do. In 2012 we got a rarer form of weather market rally, but it also resolved in an unsurprising manner.

The truth of both is that weather market rallies don’t last long, and often don’t even last as long as the weather conditions that cause them.

They’re a gift from the gods for those who need to hedge crop prices, but those gods are fickle and take away their blessings awfully fast.

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