Bulls hoping for a big weather rally this summer got a setback over the winter, when government forecasters announced the end to La Niña cooling of the equatorial Pacific. This flip side to El Niño is blamed for some of the droughts seen in the Midwest over the past 60 years.
But a neutral reading, between La Niña and the El Niño warming, could turn out better in the long run for farmers banking on weather rallies during the growing season. They may get their cake and be able to eat it too.
La Niña tends to bring hot, dry weather to parts of the Midwest, triggering not only rallies, but also much below-average yields. That can be a mixed blessing, to be sure. El Niño, on the other hand, tends to improve moisture and yields, but not prices, which can fall if surpluses mount.
A neutral reading on what’s known as the El Niño Southern Oscillation (ENSO) index doesn’t mean average yields. Rather, yields in the past were sometimes very bad, sometimes very good, and everywhere in between. In the 35 summers with neutral readings since 1955, corn yields averaged 2% better than normal, with soybeans coming in 1% better. Above-normal yields were more frequent than subpar years, with only 1 in 3 years suffering.
But it doesn’t take actual damage to the crops to generate rallies. The mere threat of a blast of hot, dry weather during reproduction can be enough to send prices higher, at least briefly.
Rallies aren’t guaranteed. But in the years since 1974, December corn futures moved more than 5% off its late fall highs 50% of the time. A 5% rally this year translates into a December futures high of $4.15. But the average rally was nearly 13%, or a high of $4.4625 this year.
Those numbers pretty much match the projected selling range based on current fundamentals of supply and demand. So, there’s at least some hope for corn growers to see profitable levels this summer, at least for a time.
For soybeans, rally potential looks even greater, at least on paper based on historical trends. In these neutral ENSO years, November futures took out its late fall high by more than 5% two-thirds of the years since 1974. In 2017, that translates to $10.95. The average rally topped the fall high 16%, which translates to $12.105 this year.
That range tops the projection from my supply-and-demand model, which has a selling high of $10.75 — if farmers plant 90.5 million acres this spring, a record. Fewer acres could boost my forecast selling range into the levels projected by the ENSO pattern.
Lurking in all these numbers is another clue about what could cause soybean rallies, especially late in the growing season into harvest. ENSO-neutral years show a modest, but statistically significant, tendency toward lower yields in South America. This is especially true in years when the cycle is coming out of La Niña the previous winter.
Of course, there’s still a debate among forecasters about whether 2016 was even a La Niña event. Meteorologists in Australia never pulled the trigger according to their definition. And even U.S. forecasters called it a weak one.
Moreover, there’s a slightly better than 50-50 chance an El Niño will develop during the fall. The warming of the Pacific is commonly associated with crop losses in Australia, where it can devastate wheat and coarse grains. And if El Niño looms, there’s potential for above-average U.S. corn and soybean yields, though confirmation of the event wouldn’t be known until well after harvest.
All of these forecasts come with a key caveat: There’s no surefire way to predict what will happen based on the ENSO cycle. Last year, for example, I projected good chances for lower yields if the previous El Niño ended. It did, and record crops resulted anyway. But the rally targets identified by this research were met anyway, providing profitable prices for growers ready to meet the challenge.
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