Wow, Weather!

 

It’s the time of year when the market shifts its focus to weather. Markets trade based on weather during critical weather periods: spring planting season for northern hemisphere production, planting season in the southern hemisphere, etc. This year’s erratic weather, however, has been a larger and more constant factor in the market. One can blame La Niña, the global interdependence of commodity markets, or tight stocks across the board. Whatever the cause, weather for this upcoming spring is being closely watched due to the need for ideal weather in maximizing domestic production.

 

So what are the weather experts saying? Mostly, they are saying there is plenty of uncertainty ahead, and with uncertainty comes the dreaded word “drought.” More than a few reputable weather professionals are noting how long ago the last major drought in the U.S. took place. Some three-month weather models are pointing to potential dryness in Nebraska, Kansas, and Iowa, all major corn producers. In 1988, the last year the U.S. had a significant, widespread drought, corn and soybean crops were devastated. The average yield for corn dropped nearly 35 bushels per acre from the year prior, to 84.6 bushels; average soybean yield fell 20 percent from the 1987/88 crop year to 26.8 bushels per acre. For perspective, a corresponding percentage decline in yield in today’s terms would mean average corn and soybean yields of 108.5 and 34.8 bushels per acre, respectively. Numbers like those are why the weather will be watched very, very closely this spring and summer.

 

Although given little press up to this point, regionalized flooding is a very real concern, particularly as it affects pre-planting activities and the pace of planting. Soils are saturated with record snow levels in much of the eastern and northern portions of the Grain Belt. Per the National Weather Service, above-average precipitation is expected for a large swath of the eastern Corn Belt over the next month (see graphic). Depending on the rate of this year’s spring thaw, flooding may occur in low-lying areas and acreage near rivers and tributaries.

 

USDA’s projections for plantings include 92 million acres of corn and 88 million acres of soybeans—every bit of which will be needed to begin the process of rebuilding domestic stocks. In reality, it will take two years of ideal production—outside of significant demand degradation between now and then—to get stocks back to comfortable levels. It will also take two years of harmless weather, a bet that after this past year’s barrage of bad weather is far from safe.

 

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