13, 2007 --In southwestern China, the drought is so acute crops are stunted and more than five million people are short of drinking water. In the northwest region of China, hundreds of thousands of people needed emergency water supplies because of low rainfall in Shaanxi provence. Earth Observatory, (nasa.gov) recently reported, "normally rainy months in China's south, February and March 2007 saw almost no rain. In some places, the warm weather allowed winter crops like winter wheat to thrive, growing more thickly than normal. In others, the warm weather and lack of rain withered plants. The drought hurt al least 13.5 million hectares of farmland throughout China."
Closer to home, unseasonably cold and wet weather in the midwestern US has the marketplace worried about delayed plantings of new crop corn. For maximum yields and production, the crop must be planted early. A late planted crop not only yields less than expectations but farmers are quick to shift acres back into soybean production. AgResource warns, "The corn market cannot allow delayed plantings switch out 3-4 Mil acres of intended corn acres to other crops. Next week's weather is critical to deciding the rate of late April US corn seeding."
As recently as a week ago, one of the worst performing markets was wheat where prices were $1.25 a bushel off the highs set last October. But a hard freeze extending as far south as northern Texas has transformed the wheat market into one of the best performing markets. Nearby Chicago wheat futures in two weeks have rallied nearly 70 cents a bushel as the trade tries to get a handle on just how much damage was done to the crop. The market is also concerned over the drought-like conditions in China. No other force can change the outlook for a market so quickly as weather. Mother Nature can take the most bearish of markets and turn it poker hot in days. She can take the most bullish of markets and break it in no time at all. Or, she can take a bullish market and make it far more bullish than anyone imagines.
In the fall of 1972 for example, soybean prices were as low $3.50 a bushel. But Mother Nature hit the midwest with an unusually wet harvest, pushing prices up to $4.50 in February '73. A moderately wet spring caused more fears and prices shot on up to $6.35. As those fears subsided, values slipped back to $5 a bushel in late March.
Unfortunately, a hot and dry scenario soon followed and by early June, futures touched $12.90 a bushel, a record high that stands to this day. A similar scenario unfolded in '88. Soybean prices were under $5.50 in the final weeks of '87 but rose to $6.50 a bushel in the February to March period when a wet spring suddenly surfaced. Fears of planting delays and acreage shifts pushed soybean prices up to $7 a bushel in early May. Then, as in '73, the Midwest was blasted with a hot and dry weather pattern and by June, prices kissed $11 a bushel.
In '88, market analysts expected soybean prices to hit an all time high and reach into the "teens." What kept that from happening was the strength of the US dollar. The dollar rallied so strongly it broke the back of the bull soybean market despite crop threatenind weather. Mother Nature was trumped by the dollar!
This year is being compared to that of '73 and '88 by weather and market historians. They note that a wet spring oftentimes is followed by a hot and dry summer. Already, a hard freeze has damaged the US wheat crop, sparking a 70 cent rally. And fears of planting delays for new crop corn are rampant. If history repeats itself, a hot and dry scenario will unfold by June and grain prices across the complex will be hitting new highs as they did in the Great Bull Market Years of '73 & '88.
There is a rub, however and a bullish one at that. The US dollar index on a monthly basis ended this week at 81.92, its lowest level in several years. Should the market slip much lower, it will be lower than where it was in 1991. Should those levels be taken out on the downside, the mighty dollar index will be back to where it was 20 to 30 years ago. A weak dollar, pure and simple will be bullish grains.
There are drought like problems in China, Australia and Russia while US farmers are coping with a freeze that has damaged the wheat crop. The spring planting season has been and is forecast to be so wet that timely seedings are not a certainty. In the coming May-June period, if the weather turns unusually warm and dry, grain prices are certain to firm once more. And if the 'ol greenback drops much below 81.00, the stage will be set for a dynamic bull market for all hard assets and it could be led by the grain complex.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)