CARD: Center for Agricultural and Rural Development

Drought concerns in the United States were the resounding cry throughout the Midwest last spring. The drought fears were so severe that on May 16 the U.S. Department of Agriculture (USDA) scheduled a press conference to unveil the findings of the National Drought Policy Commission. This coincided with the National Oceanic and Atmospheric Association's (NOAA) 90-day forecast calling for drought conditions to persist. There is no doubt that weather premiums exist in futures contracts for upcoming crops and will remain until the crop materilizes. The hard question to answer is: What is the size of a given weather premium?

Basically there are two sets of information that influence the market: fundamental information, which consists of basic supply and demand data and forecasts; and psychological information, which consists of recent price trends and more subjective market expectations coming from the trading pits. Both influence the current weather-driven markets.

We see that this year's harvest time corn (December 2000) and soybean (November 2000) futures were trading fairly flat until around January 10-12. At that point, we see the start of a nice bull run that has lasted five months and allows corn and soybeans to add about 12 and 17 percent to their prices, respectively. Even though the late summer and fall months of 1999 had been relatively mild and dry, there were no immediate drought worries, because we had winter and spring ahead of us.

Most of the initial market move coincides with the USDA's release of the January World Agricultural Supply and Demand Estimates (WASDE). From the previous month, the USDA lowered 1999/00 corn production by 100 million bushels and increased usage by 100 million bushels. The end result, of concern to the 2000/01 crop, is that ending stocks for 1999/00 were lowered 280 million bushels for corn.

For soybeans, the changes were not as large, with a 30 million-bushel reduction in ending stocks. These, of course, become 2000/01 beginning stocks. Through mid–March, the harvest time contracts trade in a range of $2.45 to $2.55 per bushel for corn and $5.20 to $5.50 per bushel for soybeans. The market's ability to hold at this price level further indicates that the move was more fundamentally based. The small market fluctuations at this time are more indicative of concern over the South American crop. These smaller peaks and valleys are primarily due to changing weather forecasts and production estimates as the South American crop moves from pollination in January to harvest of the first crop in late April.

During the last week of April into the first week of May the markets reflected a true weather rally. The only fundamental data available was the USDA's crop progress that showed plantings and emergence well ahead of schedule. During this rally, the corn market added about 16 cents and the beans shot up 32 cents. The FAPRI (Food and Agricultural Policy Research Institute) U.S. Crop model has a price response of approximately −4 to 5 cents per bushel for a 100 million-bushel increase in corn production and around −35 to 40 cents per bushel for a 100 million-bushel increase in soybean production. Since the crop was in the ground and needed moisture, assuming traders have a similar price response, the market was assuming the conditions were decreasing production by 300 to 400 million bushels, and soybean production by around 100 million bushels. This was also well ahead of the USDA's first look at the 2000/01 crop, which did not come out until after the National Drought Commission Report on May 20. It is interesting to note that the markets have been in a downward trend since before the report and NOAA's announcement on May 16. Adequate rains have helped this crop limp along. For example, because of rains early in the week of May 14-20, corn futures shed 10 cents and soybean futures lost about 23 cents. The USDA Weekly Weather and Crop Bulletin indicated for the week that rain in the northern Corn Belt significantly eased long-term drought. Later in the week, when it may have appeared the rains were not as widespread, corn and bean futures rallied 6 and 11 cents, respectively, indicating the market was putting around 100 million bushels of corn and 100 million bushels of beans back in the picture.

It appears as of this writing that most of the weather premium has eroded and the markets are settling in on the expectation of a 9.7 billion-bushel corn crop and a 2.99 billion-bushel soybean crop.

Even though recent precipitation in the Corn Belt has reduced drought worries for the short-term, this crop is still a long way from the bin. Given the dismally dry soil conditions at planting time, this crop will need timely rains through out the growing season. We still have the pollination period to get through. If hot, dry conditions dominate in late June and in July the stage could be set for another weather rally. ♦