STEVE KELL: Sell on rumour in a weather market

Steve Kell’s
Market Minute

One of the things that we can have great confidence in as we watch the grain markets unfold each year is that somebody is having a weather problem some place in North America, and the markets are taking notice. How do we know when the weather rally is peaking?

In the first half of the 2021 growing season North American farmers have seen two very stark drought events develop. One is in southwestern United States (New Mexico, Arizona, Utah and Texas), and a second one is in the northern plains (the Dakotas, Manitoba, and southern Saskatchewan). Seeing regions of red on the drought monitor map as early as mid- May is certainly concerning. Low-soil moisture this early is a troubling situation for crop prospects when the hottest and driest days of summer still lie weeks ahead. More problematic is that smaller plants with still shallow roots have less capacity to withstand a water shortage.

There’s an old saying in the commodity markets: “Sell the rumour. Buy the fact.” As simple as it sounds, it’s a really effective strategy to manage a weather scare. In many cases the anxiety around a potential weather problem turns out to be a bigger price mover than the actual production caused by a weather event. The fear of a problem creates price anxiety. Even in 2012, (which was a summer of devastating drought across much of North America), as we entered September, grain prices slipped well below their peak levels of mid-summer. The crop wasn’t saved by better weather later in the growing season but rather the price moves had adjusted the demand to better match the expected supply and cash values levelled out. Weather rallies tend to be an early season phenomenon. If capturing the “drought rally” is part of your marketing plan, there’s no time to be complacent.

A rising tide floats all boats, and a good weather market raises all crops. Take for example this summer’s dry growing conditions in the upper U.S. plains and the southern Canadian prairies. This region is hard red spring wheat country. Certainly the weather has impacted the Minneapolis wheat futures as one would expect, but the worries over the spring wheat crop’s yield potential have spilled over into the Chicago wheat futures as well. The Chicago wheat futures contract is for soft red, and most of the areas which grow soft red wheat still have pretty adequate soil moisture levels, indicating that the crop is largely in good condition. If hard wheat supplies are tight after the 2021 harvest, millers and bakers can’t really substitute soft wheat for hard wheat, or else they’d end up with a loaf of bread that looks more like a pancake. The rising tide in red spring wheat prices has floated soft wheats, and hard red winter wheats with it. It’s a great marketing opportunity for sellers of the other classes of wheat, but it would be overly optimistic to believe that a North Dakota drought can create a season of scarcity in soft wheats in the Great Lakes basin.

The key things to bear in mind when trying to determine the upside potential based on another region’s weather worries, is determining the overlap of grain output into competing markets. So far, the overlap is very limited. The regions of North America which are currently under significant drought stress do not produce very much of the same crops which southern Ontario farmers grow.

The crops where the drought in the U.S. northern plains and southern Canadian prairies have the greatest potential to impact on prices in our marketplace are the ones where the drought a ected regions are signi cant producers in our supply pipeline. Crops like canola, red spring wheat, and white beans are produced on a large scale in the Dakotas and Manitoba, and are signi cant competitors to Ontario grown crops in our marketplace. Manitoba and Saskatchewan might not be significant in terms of global soybean supplies, but they do have an impact on canola, particularly to the three oilseed crushing facilities in Ontario and Quebec who rely heavily on Manitoba and Saskatchewan for their canola feedstock supply.

It’s critical to keep in mind that weather markets tend to be a fairly short term feature. With the notable exception of 2012, most weather rallies run out by early July, so crafting your pricing expectations to match the timeline is critical. You can miss a weather market about as easily as you can miss a train. You might end up standing on the platform until next November when the South American weather rally is scheduled to arrive.