Why A Cool And Wet Summer Is More Likely For 2015 And Bearish For Soybean

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Includes: DF, KHC, SOYB, TSN
by: Bill Liu

Summary

El Niño conditions are more likely to continue through summer 2015.

The cool and wet summer weather pattern in 2014 is more likely to repeat itself in summer 2015.

Cool and wet summer weather pattern is more likely to produce above trendline soybean yields.

Generally a cool and wet summer weather pattern is beneficial for soybean yield prospects. Higher than expected yields are bearish for price of soybean as represented by the Teucrium Soybean FundSOYB. And we believe that such weather pattern is likely to emerge once more in year 2015.

According to NOAA April ENSO update, El Niño conditions are presented, and it estimated that there's an approximately 50-60% chance that El Niño conditions will continue through Northern Hemisphere summer 2015. Therefore we believe that cool and wet weather pattern, as that in summer 2014 and other years with El Niño conditions, is likely to repeat itself in the 2015 soybean growing season.

For the last 14 years, we consider that there are 4 years with similar El Niño weather pattern as year 2015.They're year 2003, 2004, 2005 and 2010. Those years were characterized by positive values of Oceanic Nino Index (ONI) presented at the very start of the year and this positive value lasted at least into late spring.

Source:Historical El Nino/ La Nina episodes (1950-present)

To predict the summer weather of 2015, we can look back to those years with similar initial weather conditions. We will focus on early spring temperature (in February) and summer (June to August) temperature and precipitation.

A looking back at years with similar weather patterns

Year 2003

2003 weather pattern

Source: National Temperature and Precipitation Maps

The year 2003 started with Oceanic Nino Index (ONI) at 1.1.The spring was cool for the eastern parts of US and this temperature pattern continued through summer. Unfortunately, though most parts of the eastern US was wet for the summer , the western Corn Belt was dry during the growing season, especially for Iowa, the top producer of soybean. This regional drought event had significantly reduced yields of soybean.

Year 2004

weather pattern 2004

Source: National Temperature and Precipitation Maps

Year 2004 started with ONI at 0.3.In February, the cool weather pattern mainly showed in the southern and southwestern parts of US. And during summer most parts of US showed below average temperatures. Also improved soil moisture conditions presented in the Midwest, compared with year 2003.The yield of soybean was above the trendline for this season.

Year 2005

weather pattern 2005

Source: National Temperature and Precipitation Maps

Year 2005 started with ONI at 0.6, which was the same as year 2015. Temperatures were above average across most of the contiguous US during February. This weather pattern continued into the summer. Though most parts of Illinois and the eastern Corn Belt were somehow dry in the summer, the yield of soybean was above the trendline for two consecutive seasons.

Year 2010

Weather pattern 2010

Source: National Temperature and Precipitation Maps

Year 2010 started with ONI at 1.6, the highest value of the last 14 years, represented a strong El Niño. Cool temperature anomalies were presented across much of the contiguous US during February. But this temperature pattern turned into warmer-than-average conditions during summer, especially for the Southeast US. For the most parts of Corn Belt, precipitation was also above average during summer. For the northern parts of Iowa and Illinois, the precipitation was much above average. The yield of soybean was above the trendline.

weather pattern 2015

Source: National Temperature and Precipitation Maps (Left Graph)

NOAA CFSv2 SST forecast anomalies with 1982-2010 climatology(Right Graph)

Given 3 out of 4 years since year 2000 with El Niño conditions US soybean yields were above the trendline, and NOAA still put the probability that El Niño will continue through the summer at 70% , we believed, for now, that probability of soybean beats the trendline yield 45.1 bushel/acre for season 2015 could be much above 50%.

soybean yields actual vs trendline

Source: CME Fundamental Reference

We believe that in the cool and wet summer weather scenario, with sufficient precipitation for top producing states, like Iowa and Illinois, in the growing season, the yield of soybean could be close to that of season 2014, which was 47.5 bushel/acre. The estimated stock-use-ratio for 2015/16 crop could be as high as 16%.This value could be the highest since year 2007 and it's obviously bearish for price of soybean.

Source:USDA World Agricultural Supply and Demand Estimates (2015/2016 figures are our estimations)

But we should always keep in mind that weather patterns can change dramatically in a short period, and the precipitation in top soybean states can also be insufficient in the crucial months of growing season, even in a year with El Niño conditions, as the case of year 2003.

We recommend that producers protect some downside risks of soybean price with put options (with strike prices under 900 for November contract, for example), and to increase the coverage once the summer weather patterns become clearer and new crop soybean planted area is certain by early summer.

Retail investors can watch for companies that can benefit from lower soybean prices, such as Kraft Foods (KRFT) ,Tyson Foods (NYSE:TSN) and Dean Foods (NYSE:DF). Also many food and feed producers in China, the world no.1 soybean importer, can profit from lowered soybean prices, such as COFCO, China's largest food processor and grain trader, and WH Group, the largest pork company in the world.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.