In the movie The Perfect Storm, three different storm cells came together to create the a storm that George Clooney, Mark Wahlberg and the rest of the crew didn’t stand a chance against. I can see something of a version of that happening in the grain markets right now.
Storm 1: Weather
The uncertainty as to if and when El Niño would start to dissipate and if or when La Niña may start to form and what that could mean for weather across North America has been hotly debated for the past six months.
An open and early spring got everyone in the fields early. Concern about frost held many off, but for the most part it never did have much of an impact. Persistent dry weather started to cause concerns as seeding finished up in record time with little or no rainfall across the entire Prairie region.
This started to catch the attention of grain trade speculators as dryness was also evident throughout parts of the U.S. Grain futures started to respond accordingly by building in some risk premium into the futures and driving them higher.
Then at the end of May and early June, rain started to fall at almost the perfect time and most Prairie crops were off and running!
At this time forecasters agree that El Niño is on the way out or gone and that La Niña was forming, which would mean a definite change in weather patterns across North America for the summer. The unknown now is how strong a system La Niña will be, as that would certainly impact weather intensity.
Storm 2: Pricing Discipline
Do you have a pricing plan, should you follow it or ride the waves and see what happens?
As we headed into spring, old crop inventories of special crops, canola and wheat were starting to get low on the Prairies. This was helping to push prices higher, especially during early May when it was getting to be rather dry.
Old crop offers of $14/bu. for peas, $12/bu. for canola and $7/bu. for wheat were common; these numbers were far more appealing than the new crop bids of $10/bu. for peas, $11.50/bu. for canola and $6.50/bu. for wheat.
Many producers I talked to were holding out for better new crop bids, because they had to go up if we were running out of old crop grain, didn’t they? Riding the waves not knowing what may be coming at them!
Then rain started to fall. New crop prices started to fall as the concern of yield loss disappeared.
New crop prices were no longer following old crop prices higher. They had been thrown from the nest and liberated to follow their own path, and with the rains that path was lower!
Storm 3: World events
Many events will impact commodity markets, including weather in South America, China, Australia, Russia and the EU. Some of these places are struggling while others are expected to produce above average crops this coming year.
Financial, stock and commodity markets are on edge in the wake of the U.K.’s vote to exit the EU. Before the referendum, caffeine-laced traders and speculators were jumping in and out of markets like cats on a hot tin roof. This caused vast amounts of money to move within markets causing extreme volatility, which further feeds the fervor and triggers more reaction and money movement in all markets, including commodities.
Now we have some very over-reactive markets at a time when our grain markets are starting to look a little bearish. In the wake of the U.K.’s Brexit vote, that bearish tone in commodities will likely end up being overdone, and grain futures will probably fall harder than they would have. It is likely that the bearish tone in grains will drag on longer than expected because of this, unless we have some kind of production or quality disruption in the world crop that would advantage us in North America.
As in the movie, it feels like we are at the point where these three storms are about to come together. We are right in the middle trying to ride it out, hoping that don’t get rolled under because we didn’t better prepare.
Are you prepared? Did you have a marketing plan and did you follow it and pre-price some new crop grain before this? Or are you out there floating in your boat waiting to see how big the waves are going to be, trying to ride this one out for the hope of something better just ahead?
Market discipline is knowing when to price at profitable levels and when not to chase markets any higher. You have no control over them, so why risk it?