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As the U.S. Drought Eases

The big weather news, other than the storms that have finally brought winter from coast to coast, is our forecast a few weeks ago of an easing in the U.S. drought. This has had bearish implications for the corn and wheat markets, especially with the best moisture in 2 years blanketing Iowa, Nebraska and Kansas, while the Deep South has seen rains as well.


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SOURCE: USDA

The drought monitor above seems ominous for U.S. crops, but traders who focus in on this are missing the picture that top soil moisture is improving. In addition, potentially improved weather in Canada this spring (soil moisture levels are ideal), Australia, Ukraine and China all could suggest another 10-15% down in corn and wheat prices, barring any heat and dryness this summer. Weather scares are always possible this summer, but good moisture the next few weeks is causing a "psychological wash-out" in corn and wheat prices.

There are a lot of weather forecast firms that have been using the analogy of the mid 1930's dust bowl years, and multi-year droughts of the mid 1950's, to paint a picture of potential more doom and gloom this spring and summer. However, two key teleconnections that we have talked about before (-AO/-NAO) index have been at least partially responsible for the big late winter increase in moisture over many areas. Yes, the U.S. drought monitor still shows drought conditions, but traders who just look at this have been missing the big picture. Topsoil is moisture improving and the prospects that many of these dry areas may be relieved later in March or spring could result in a big rebound in grain production.


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SOURCE: WSI

This block and the -NAO, couple with other factors in the Pacific, is also acting to slowly erase the U.S. drought.


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The negative NAO (above) could also have a big effect on spring-time weather, the severe weather season and if the drought continues to ease over the Plains and Western corn belt.

As Drought Breaks, Which Markets Will be Influenced?

In a recent post a month or so ago, we talked about the potential longer term bearish implications in the corn, soybean and wheat markets. Grain prices have sold off roughly 15% from their highs due to a variety of weather and demand factors. The only bullish grain right now is in the nearby soybean contract due to intense logistical issues coming out of Brazil (many roads flooded, and poor infrastructure to get beans to export). However, South American and U.S. weather is improving. While it is rare to see corn and wheat trade in the U.S. so early in the season , markets are psychological and the big weather story that had world repercussions last summer (U.S. drought), is slowing easing.

Two ETFs that have the potential to decline another 10-15% in coming weeks/months is the Teucrium Corn Fund (NYSEARCA:CORN), and the Teucrium Wheat Fund (NYSEARCA:WEAT). Granted, we have already seen a nice sell-off and spring and summer weather can be volatile, offering many short term buying opportunities, too. However, the overall trend is likely lower in these markets in the weeks and months ahead.

Cattle prices too could be negatively impacted by the easing Plains drought, though a lot more rain is needed in Texas. If heat and dryness do not return to Kansas and Texas this summer, then a potential rebound in herd numbers of livestock, may be possible months down the road. While cattle is often a demand related market, over the last 2 years we have seen big issues with ranchers liquidating their herds due to higher grain prices (too expensive to feed them), and tortured, dry pastures.

Finally, there will be numerous feed, farm equipment and fertilizer companies that will both see their corporate profits rise or fall depending on if drought conditions return or not. Total farmers' income is often directly dependent on how much they plant and more importantly, weather and crop yields. Hence, if this drought continues to ease as I expect, will give the U.S. economy a multi-billion dollar shot in the arm later in 2013 when potential big crops are harvested.

Source: U.S. Drought Easing: A Potential Multi-Billion Dollar Shot In The Arm For The Economy