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We’re in weather market madness

Weather drives grain markets. And this year, weather is also driving farmers to distraction

We have had another summer of weather extremes.

It started in May with dry weather across the Prairies and parts of the U.S. plains, and excessive rains across large U.S. grain-growing regions.

June brought hot, dry spells across the Prairies. Then we topped it off with rain, hail and tornados in July — almost the prefect recipe for a weather market rally. This caused grain futures markets to react and overreact in a short period of time.

Feed barley went from $4 to $5.25/bushel in a month, then back down to $4.25/bu. in less than three weeks.

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Canola markets ran up $100/tonne from May 1 to June 30, and then dropped off $53/t by the end of July.

Minneapolis wheat futures went through three high/low cycles starting May 1 at $5.55/bu. up to $6.07 on May 21, then down to $5.55 by May 29, back up to $6.11 on June 10 and back down to $5.62 on June 19 before heading to an ultimate high of $6.53/bu. on June 30 and plunging to a low of $5.29 on Aug 3.

Of course most of this futures market action was fueled by speculative activity by the funds as they saw the opportunity to get in on a market weather rally and make some money.

The growing season got off to an early start with an open and dry spring allowing crops to be seeded earlier than normal. Problems started to show about the middle of May, as there had been no rains since the spring melt and temperatures were warming. Markets started to take on a bullish tone as the hot, dry weather looked like it was going to persist.

By the end of May some areas had received scattered showers but not enough to make a real difference, so markets started to crank up even more. June remained hot and dry for the most part. This pushed markets into an upward frenzy, no doubt stimulated by speculative funds taking on huge positions to make some money in a true weather market scenario.

In the first week of July the first real general rain fell across a good part of the Prairies. The spec funds stopped buying and sat back to wait and see if this was a pause in the rally or the beginning of the end. When more significant rains fell across the Prairies in the second week of July it was enough to make the specs cash out and take their profits. The market rally is over.

The cause and effect

Weather conditions across North America have been a little more extreme the past couple of years. A big part of the cause of this is the El Niño effect that has been building off our Pacific coastline. To date, Eastern Pacific sea temperatures are up three degrees above normal. This is a significant change over a short period of time which will continue to impact North American weather patterns for some time.

Some forecasters predict that the El Niño effect will remain in place for the rest of 2015 and likely the spring of 2016. With this system as strong as we have seen since the early 80s, and forecasters are calling for a wetter-than-normal harvest period (September to November) and a dryer-than-normal winter as well. Rest assured there is more to come from this weather system.

We are not out of the woods when it comes to extreme weather events.

Response

How do you plan to manage and react to this kind of weather information from a marketing perspective?

Have you reviewed your cost of production numbers and readjusted your anticipated yields to honestly reflect what you have in the field?

The recent CWB crop tour reduced overall production forecasts by 15 to 30 per cent from last year. If your yields are reduced, your break-even pricing targets are going to change. You need to know those new numbers.

Grain market values have come off of the July highs but some crops (canola, peas, lentils, durum) are holding at very decent pricing levels that should meet or exceed your break even pricing targets.

Decide if you should be pricing some of these crops now to get some cash flow back into your operation to pay bills and save interest charges. This would give you the option to hold off selling some other crops if you expect those markets to recover after harvest. Always a big question mark that comes with big risk!

Is the weather too risky for you to physically price any of your crops before you have them in the bin? Maybe protecting your canola prices paper (options contracts) is something to consider. You can protect a floor price with no delivery commitment so if you end up unable to deliver any grain you won’t have to buy out of a contract later.

This year will not be remembered fondly by anyone as a great year in farming because of these weather extremes. But with some preparation and planning, you can be ready to make the best of a bad situation. Weather drives markets and this weather isn’t done with us yet!

About the author

Columnist

Brian Wittal

Brian Wittal has 30 years of grain industry experience and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd.

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