Kub's Den

A woman I know who works at the local nursing home claims the residents are calmer when the sun is shining. On cloudy days or in gloomy weather, there will be more alerts for the staff to respond to, and just a generally less cooperative mood among the population.

That may be just one woman's experience, but there are multiple scientific studies that all confirm the same thing: weather affects human behavior. Better weather leads to more generous tipping of casino staff. Cloudy days make university admissions staff less likely to accept an application. Drivers are more likely to be kind toward hitchhikers on sunny days than on rainy days. And humans just tend to have a better mood, better memory skills and better cognition during pleasant outdoor weather than in gloom.

If there were still pit traders in Chicago, buying and selling grain futures contracts, we could perhaps try to draw some conclusions about the volatility of grain prices being affected by Illinois weather conditions. And in fact, in 2003 some researchers from Ohio State University did try to prove a relationship between positive daily performance at various stock exchanges around globe and the incidence of morning sunshine in the cities where those stock exchanges are located. It worked!

But grain traders are no longer all gathered in one city, being influenced by the weather under one shared sky. A corn contract is as likely to be traded by an ethanol plant manager in Minnesota, where it's raining, as it is to be speculated on by an investor in San Diego, where the sun is shining.

And what about all the trades that are being triggered by a computer algorithm, with the underlying code living in some windowless server room? In today's grain futures markets, we wouldn't expect those computer programs' emotionless trading signals to be affected by either gloomy or shining weather, and the fund managers who are trading on discretionary human judgement are all scattered across the globe and experiencing totally diverse weather patterns at any one moment in time.

But grain market traders should still care about the weather, right? Weather affects how much grain will grow. A thunderstorm in Ukraine can change the price of wheat in Australia, and a monsoon in Malaysia can affect the price of soybeans in Ontario. Right?

Apparently not.

Or at least, not at certain times. Take the soybean futures market, for example. While there has been both bullish and bearish new information processed by this market over the past week, prices have dropped an additional seven cents since the bearish March 31 quarterly Grain Stocks report. They even dipped a few cents lower after Tuesday's monthly World Agricultural Supply and Demand Estimates report, which notably showed that USDA economists have increased their projection for the current Brazilian soybean crop as high as 111 million metric tons (a 3% increase over the previous 108 mmt number).

And get this -- despite widespread flooding in Argentina's major soybean-producing states, the USDA *increased* its projection for the Argentinean crop to 56 million metric tons (a 1% increase over the previous 55.5 mmt number).

Now I do understand that these big annual projections, released monthly, cannot be expected to nimbly respond to in-the-moment or ongoing weather challenges. I don't begrudge the economists for preparing their monthly report to reflect the generally favorable growing conditions that have been seen for Argentinean soybeans prior to the past week.

But the futures market? The market that is meant to be assessing and pricing in the risk of lost supply, which may be actively being lost as I write this and may take a few days to confirm? In a rational world, yes, I believe the futures market should respond more strongly to ongoing news than to backward-looking projections.

So far, soybean futures prices haven't shown much of a bullish reaction to the floods in Argentina, so let's think about why not. Argentina is the world's number 3 producer of soybeans, with approximately 49 million acres planted in hopes of being harvested this spring. I've seen estimates that the recent flooding has left 4.9 million acres of soybean land either under water or currently unharvest-able because the roads are washed out. That may be an overstated number -- it's hard to say while the rain waters are still washing through the rivers and irrigation channels. If it were true, it might account for somewhere around 10% of the crop.

Yet global soybean prices haven't popped upward. I theorize that grain markets are less likely to respond to excess moisture arguments at any time, simply because the extra rain does boost yields in the nearby areas that don't get washed away completely. And they appear especially unresponsive to excess moisture arguments during the harvest timeframe, once the grain is already "made." Farmers in several regions of the U.S. experienced this frustrating phenomenon during the 2016 harvest.

Perhaps the algorithms reading satellite data and the traders using their human judgement only feel that extra risk premium is appropriate in the price during the middle of a growing season, but not necessarily at harvest. Wet-harvested grain's quality losses open up interesting arbitrage opportunities for physical traders, but don't necessarily alter a global supply-and-demand table.

It would be difficult to parse out whether the 2016 soybean rally that started last April was really due to similar Argentinean flooding issues last year, or whether that was just a coincidence of timing and there was actually some outside factor driving the trend.

If weather can affect human moods -- and the data suggests it can -- then it should definitely affect grain traders most of all. And even if they're no longer easily influenced by weather during the harvest timeframe (especially the South American harvest timeframe), well, they still might care about planting weather in the Northern Hemisphere. The next few months will give us another test of that theory. At the very least, there will always be fundamental concern about crop progress through the growing season -- Rain? Sunshine? Hopefully a little bit of both.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(BAS/SK)

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