Weathering The Weather Market

The weather hasn't exactly smiled on Missouri farmer Robert Sweany lately. First, spring downpours flooded his corn and soybean fields. Then, a summer heat wave baked them rock-hard. Even if Mother Nature cooperates from now on, the farmer expects only a meager fall harvest. "Once the combines start rolling, I don't think the grain's going to be there," moans the 37-year-old Sweany.

In this poor growing season, you would think crop prices would be heading skyward. Think again: A sprinkle of Midwestern rain recently sent corn and soybeans plunging in a panicky sell-off, with traders worrying that the harvest might be better than expected. The market is confounding farmers and other experts who expected tight supplies and strong demand to keep it rolling. "The market is totally following the weather and paying attention to nothing else," says analyst Daniel E. Markey of Agri Analysis Inc. in Evanston, Ill.

Welcome to a "weather market," where a few raindrops can count for more than the informed outlook for corn and soybean shortages. The latest weather forecast is still driving prices, even though many conclude it's too late to resurrect a decent crop after the trauma of the past few months. When downpours turned the nation's breadbasket into a quagmire this spring, it made sense to eschew conventional market data. The rains delayed planting for a month, setting the stage for an awful year. Farmers in the waterlogged southern grain belt cut back their acreage and switched to fast-growing seeds that produce smaller yields. A July heat wave made matters worse: Corn prices soared to $2.96 per bushel, up 28% for the year, and soybeans to $6.55, up 17%.

Then, pandemonium hit the crowded trading pits, touched off by nothing more than a few scattered showers and a modest break in the heat. Sensing a reversal, commodity trading advisers--the mutual-fund managers of the futures business--turned bearish all at once. Their mass selling put extreme pressure on prices, even though the basic outlook for the size of the crop and for demand had barely changed. "When the trends often overreact," says John P. Lass, president of Everest Asset Management Inc., a Fairfield (Iowa) trading firm. By Aug. 7, corn prices had fallen 8% from their high, and soybeans 9%.

NEW CUSTOMERS. Fundamentals should support higher prices. Robust demand in the U.S. is being bolstered by an enormous surge in exports--up nearly 20% from last year, to an estimated $51.5 billion. China, once Asia's supplier, has reduced its exports and begun importing U.S. grain to feed its expanding livestock herds. China's longtime customers such as South Korea, Indonesia, and others in the region also are turning to the U.S., whose battered farm belt is unlikely to produce enough to meet demand, analysts say. But the weather-obsessed markets are slow to get that message. "Demand is not like a drought that snaps you on the behind. It takes time to build," says analyst Daniel W. Basse of Chicago's AgResource.

The dismal supply picture also has been somewhat overlooked by the weather worrywarts. U.S. corn and soybean supplies have tightened significantly during the past six months. The robust 1994 harvest is all but used up: The Agriculture Dept. predicted in July that corn stockpiles would fall to 725 million bushels, the lowest level in 12 years. Some analysts believe the cushion will be even thinner--as little as 183 million bushels. "We see supplies approaching record lows," predicts analyst David Nelson of NatWest Securities Corp., who also expects tight soybean stocks. Warns farmer Kurt Lehman of Slater, Iowa: "It could be very tight. We're definitely not sitting on a lot ef grain."

Not all farms are suffering, though. The crops in northern Iowa and southern Minnesota look good. And if prices were to rise dramatically, it might take the edge off the world's appetite for U.S. crops. But many perils remain: Fungus, blight, or insect damage spawned by the erratic weather could cut yields. Excessive heat, which hampered corn development earlier this season, could prevent soybean pods from thriving as well. And because crops that are planted late tend to be harvested late, an early frost could be devastating. "There could be a lot of problems people don't see now," Sweany says. The weather won't salvage a poor crop, but could make it worse. And if those problems become obvious, watch for sharply higher prices at harvest time--no matter what the weather looks like.