Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

Decisive Marketing

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
May 4, 2001

Too Wet?  Too Dry?

      Wet weather and planting delays has described recent market news relating to the 2001 U.S. crop year and its production potential.  Planting delays continue to occur in the northern Corn Belt.  While planting delays can reduce yields, most have recognized that it is only early May and there is still plenty of time to plant the crop.  In fact, the wet weather has been negative to soybean prices because delayed corn planting could lead to more soybean acres.  Very wet weather can affect total production, as in 1993, but many of those in the market generally believe the old saying that "rain makes grain."

      Suddenly the D-word (drought) appeared!  Dryer conditions in the eastern Corn Belt have allowed Illinois and Indiana to proceed at a planting pace that is ahead of the five-year average.  This was offsetting concerns about the slow pace in the northern states.  Now, the "Drought Monitor Map" shows an abnormally dry and moderate drought condition spreading into Illinois and Indiana.  Dry conditions in these states, especially if drought conditions spread to include more area, could affect production significantly.  Everyone agrees that "hot and dry does not make grain!"

      The markets will likely become more sensitive to the weather news.  Large supplies have overshadowed demand and kept prices depressed.  This situation has been expected to continue.  However, while supplies have been large, strong use has prevented ending stocks from becoming excessively large.  Good production is needed to maintain these use levels.  With low corn and wheat prices along with soybean prices that are near 28-year lows, any crop problems could create a volatile market and sharply higher prices.

      Is there a marketing strategy to deal with this weather uncertainty?  One possible strategy to manage weather risk is purchasing call options.  This could accomplish two purposes.  First owning call options would make it easier to take advantage of any forward contracting opportunities resulting from a weather rally.  The calls would provide protection against missing higher prices, after grain has been contracted, if dry weather continued and sent prices much higher.  Second, the call premium gains could replace the LDP if prices end up near CCC market loan prices.  At these price levels, there would be little or no LDP.  The gains from the call options would enhance the market price and produce a net price that is above the loan price. A bull call spread (buying a near-the-money call and selling an out-of-the-money call) could lower the cost of the strategy--especially if the goal is to replace the LDP.

            Will the weather be too wet or too dry?  Everyone is beginning to pay closer attention to growing weather conditions.  Most still expect good production, big supplies and low grain prices.  That's still the most likely outcome.  Don't count on dry (or wet) weather to send prices higher, but be prepared if those conditions develop. --Melvin

University of Missouri ExtensionDecisive Marketing - May 4, 2001
http://outreach.missouri.edu/agconnection/DCT/DM010504.html -- Revised: April 20, 2004
breesm@missouri.edu