When the planting and growing seasons are under way for the major row crops in the U.S. heartland, many traders will be focusing on the grain futures markets traded at the Chicago Board of Trade, part of CME Group.
There is nothing like a rip-roaring "weather market" in the grain futures to seriously challenge the two most important emotions a trader can experience: fear and greed. In the heat of a weather scare in grains, price action can become extremely volatile and trader emotions can run very high, as the latest weather forecasts can and do turn markets "on a dime."
Trading a full-blown weather market in the grains can be a great experience for all traders. While there is some degree of a weather market scare in the grain futures nearly every year, the "full-blown" weather markets that are usually marked by severely dry weather conditions, and even drought, in the U.S. Corn Belt come around only once every several years. The last major drought and full-blown weather market in the grains occurred in 2012. Before that, one has to go all the way back to the major drought of 1988. However, a grain futures trader can expect the weather to influence the grain markets in a significant way during the months of April through October.
Seasonality in Agricultural Markets
Veteran grain market watchers know the importance of “seasonality” and its impact on grain futures prices. The summertime weather markets in the grains are a part of the seasonality factor in agriculture markets.
For corn, seasonality can be divided into three time periods: late spring to mid-summer; mid-summer to harvest; and post-harvest. The most pronounced seasonal trend in corn has been a historical decline of prices from mid-summer into the harvest period. Prices are often near their highest level in July because of factors associated with the old-crop supplies and uncertainty over new crop production— of which weather in the U.S. Corn Belt plays a major role. Even in years when a price decline in corn futures begins before mid-July, it can continue after mid-July if the crop outlook is favorable.
Corn harvest, which begins in earnest in the Corn Belt in late-September, adds large supplies to the marketing system, normally pressures futures prices to their lowest levels of the crop year. Prices usually rise following harvest. However, the "February Break" is a well-known phenomenon whereby grain prices have tended to show some degree of decline during the month of February.
In soybeans, the July-August period has usually been a bearish time for soybeans—providing the weather in the U.S. Corn Belt is normal. Closing futures prices during the last week in July have historically tended to be lower than those of the previous week in July. Closing futures prices at the end of August have also tended to be lower than those at the end of July. Also, soybean prices in late January have historically been higher than those in late December. Soybeans many times also succumb to the "February Break" seasonality phenomenon. Soybean meal and oil have generally shown the same seasonal tendencies as soybeans.
The seasonality of wheat futures has shown a tendency of prices to decline during late winter and spring as the U.S. harvest approaches. The other is to see prices rise from harvest lows (mid-summer) into the fall or early winter. Wheat prices typically begin a seasonally weak period by January or February, in most years—the “February Break.”
Historically, a pivotal timeframe for the grain futures markets has been right around the U.S. Independence Day holiday in early July. Existing price trends in the grain futures markets can be reversed or accelerated during this critical juncture of the U.S. growing season--especially for corn. Indeed, mid- to late-July typically finds the hottest weather of the year in the Corn Belt. This time period coincides with the extreme-heat-sensitive pollination stage of corn crop development. August is the most critical growing month for U.S. soybeans.
Says Conrad Leslie, the longtime and highly respected crop forecaster and market commentator: "Following the July Fourth holiday period, those who are interested in soybean and corn prices and production estimates look to the skies for the next two months for weather developments. Historical statistics indicate crops can either improve or decline…."
As an historical example, 1988 was a major drought year in the Midwest that saw corn and soybean futures prices skyrocket. It was on a Friday in July that saw corn and soybean futures prices trade sharply higher, based on ideas the hot and dry weather would continue in the U.S. Corn Belt. Then, after the close of grain futures Friday afternoon, the National Weather Service issued its 6-10 day forecast that, sure enough, called for more hot and dry weather for the Corn Belt. Corn and soybean bulls confidently headed home for the weekend.
On Monday morning, the updated weather forecasts had changed a bit, but more importantly, trader psychology had changed immensely. The drought and resulting poor U.S. corn and soybean yields had all been factored into the market with prior price gains, culminating with that Friday's big push higher. Corn and bean markets traded limit down on Monday and recorded very sharp losses for around three days in a row.
One trader who used contrary opinion thinking during that timeframe purchased put options on corn futures that Friday in which prices were pushing higher. He made a good deal of money that next week.
Weather markets in grains many times provide a classic example of futures traders "factoring in" fundamental events well before they actually occur. For example, in the big drought year of 1988, the soybean crop was most damaged during the months of July and August. Yet, futures prices that year topped out the third week in June.
Finally, trading the grains in a summertime weather market can be just plain fun. Those traders who don't have expensive "real-time" newswire feeds or other connections right to the trading floor of the Chicago Board of Trade can still log-in to the internet and go to the CME Group’s website (www.cmegroup.com) for daily price and news updates. Or you can listen to the Midwest weather forecasts and ag news on the radio--or look at weather maps on the weather websites on the Internet.