The agriculture complex offers unique opportunities for traders in the summer that often are not seen in other markets. There is a lot of information for the market to digest as it focuses on both the crop left over from the previous year and the developing new crop in the ground.
Changes in the information flow from either end can cause sharp price moves. Here is a roadmap of some of the possibilities — and pitfalls — for summer grain trading using fundamental analysis.
Perhaps most important is knowing the operative marketing year of what you are trading. The U.S. Department of Agriculture (USDA) starts the corn and soybean year on Sept. 1 and ends it on Aug. 31. The wheat marketing year runs from June 1 to May 30.
As of early summer 2013, the trade is in the last quarter of the 2012 crop. Traders are monitoring changes to current levels of domestic usage and exports to help determine the Aug. 31 level of “ending stocks.”
Normally with only one quarter left of the old crop marketing year, the trade’s focus would be on new-crop production expectations. In this year particularly, with tight supplies from a drought experienced during the previous season, the trade is monitoring old-crop demand closely.
The single biggest mover of grain prices is the annual change in supply — and ongoing fluctuation in that supply as time goes by. What makes summer grain trading so exciting and potentially profitable is that the bulk of that question will be decided in the short time period when weather really matters. The phases of grain development can be broken up into three parts: Planting/early vegetation, reproduction and fill/finish.
For corn, more than 50% of yield is determined in the small window of time in July called pollination. Cool temperatures and adequate moisture during this time are beneficial. Hot temperatures and little rainfall are a detriment. As can be seen in “July through time” (below), temperatures during this critical period can vary significantly from year to year.
For soybeans, the key yield development phase is in August. Trading during this period is both challenging and volatile. Not only does this small window of time determine a large portion of the fall harvest, but meteorologists are quick to point out they have a tough time pinning down a forecast during the summer.
The newest frontier for grain market research is tackling yield estimation from a statistical basis. Modern yield modeling research, based on the application of proven statistical techniques, provides a clearer and more valid basis for estimating production and price changes during the emotional summer price swings. For grain trading pros, this represents the largest opportunity for solid data mining. For the typical trader, understand that statistically averaging weather between April and September will return trend yields for corn and soybeans. Deviations from average weather, at various phases of development, will give either above or below trend yields. The challenge is measuring the deviation and forecasting the effect.