Extreme weather and commodities

Extreme weather investing in commodities is more than just buying commodities when there are positive price shocks from bad weather. Now we are seeing extreme weather which has been good for growing in the corn and soybean belt and the price impact has been strongly negative.

Weather shocks do not always have to be bad. Good weather conditions clearly can cause negative price shocks. This is obvious, but has not been the focus of the long-only index crowd. Given inventory management, these negative price shocks usually are less likely to be exaggerated but they can still be large. The inventory management component, however, suggests that the impact may be more long-term. The inventory can be held off the market but must be worked-off. Good weather with strong planting and inventory carry-over from the prior year is the perfect storm for a price decline. Well, it looks like we are having that in the corn, wheat and soybean markets. 

Of course, we are right now talking about this in the past tense with a 30% corn decline in the last three months. We are not forecasting that another 30% is on the way. What we are suggesting is that good weather can be just as strong an impact as what we saw in the Midwest crops a few years when heat and drought drove prices higher. The only thing stopping further decline is any chnage in weather conditions relatiev to what has already been discounted in prices.

The weather shocks have to be decomposed into local and global effects as well as short-term in periods of weeks and longer-term in periods of the production cycle. There is both a macro and micro component. Bigger move will spill-over to macro effects and more long-term.The macro component is the overall price rise across asscoiated markets and through time. The micro component is the fact that different weather can effect specific regions and be more localized or affect only nearby futures contracts. 

Well, the good weather of this crop year is enough to have a global impact and is likely to carryover to next year planting behavior. The macro issue is the impact on farmer income and this crop decline is going to hit incomes.