Grain traders and most Americans are setting their sites on the upcoming July Fourth holiday weekend. The summer respite will find barbecuing, baseball, boating and other summertime pleasures the order of the day–capped off by evening fireworks displays.
But after the Fourth of July holiday period, grain traders will even more keenly focus on the critical timeframe that occurs after the holiday. Indeed, mid- to late-July typically finds the hottest weather of the year in the Corn Belt. This time period coincides with the
extreme-heat-sensitive pollination stage of corn crop development. August is the most critical growing month for U.S. soybeans. U.S. wheat harvest is also wrapping up in July.
Already this year the grain markets have experienced serious weather market rallies, mainly due to too much rainfall either delaying planting progress or drowning out already-planted fields. The U.S. hard red winter and soft red winter wheat crops are experiencing some harvesting delays and quality problems due to recent soggy weather in those regions.
Here is what Conrad Leslie, the longtime and highly respected crop forecaster and market commentator, told me a few years ago: “Following the July Fourth holiday period, those who are interested in soybean and corn prices and production estimates look to the skies for the next two months for weather developments. Historical statistics indicate crops can
either improve or decline….”
There is nothing like a rip-roaring “weather market” in the grain futures to seriously challenge the two most important emotions a trader can experience: fear and greed. In the heat of a weather scare in grains, prices become extremely volatile and trader emotions run very high, as the latest weather forecasts can and do turn markets “on a dime.”
Some would argue that “fear” and “greed” are terms that have been over-used and over-emphasized in our industry. Yes, they have been bandied about a lot, but for good reason. In general terms, too much fear in trading will not allow a trader to even pull the trigger to enter a trade. Or, even if a trade is entered, fear will prompt a trader to set a stop that’s too tight, or to exit a trade before a strong-trending move gets well under way. Importantly, fear can cause a trader to lose sleep at night, which by itself can cause a myriad of problems.
Generally, greed will cause a trader to become intoxicated with thoughts of hitting the “grand slam” of trading, instead of being content with a base hit or even a double. Home runs and grand slams occur only rarely in trading futures. However, weather markets do allow for numerous base hits and a few doubles–and even a triple here and there.
Trading a full-blown weather market in the grains–and surviving to trade again another day–is a great experience for all traders. While there is some degree of a weather market scare in the grain futures nearly every year, the “full-blown” and highly volatile weather markets that are usually marked by severely dry weather conditions in the U.S. Corn Belt come around only once in a few years. While the year 2002 does not compare with the last major weather market of 1988 (at least not as of this writing), it does rank well above the “run-of-the-mill” weather markets that occur about every year in the grains.
Here are a few valuable lessons that a trader can learn by trading the grains during a weather market–lessons that can be applied to trading other markets during more volatile trading conditions.
–My experience in trading weather markets is that there is tremendous pressure on all traders to “follow the herd.” Deviating from the consensus market opinion is not easy. However, it’s the traders that can step in and sell into rallies or buy into dips that seem to have more success in trading weather markets. In other words, doing some contrary thinking and trading can pay dividends in weather markets.
(I’ll give you an actual example of how contrarian thinking and trading can be successful in the grains. The year was 1988, a major drought year in the Midwest that saw corn and soybean prices skyrocket. It was a Friday in July that saw corn and bean prices trade sharply higher, based on ideas the hot and dry weather would continue in the Corn Belt. Then, after the close, the National Weather Service issued its 6-10 day forecast that, sure enough, called for more hot and dry weather for the Corn Belt. Bulls confidently headed home for the weekend. Even “local” traders on the Chicago Board of Trade floor went home long–something most never do, especially over a weekend.
Well, come Monday morning, the updated weather forecasts had changed a bit, but more importantly, trader psychology had changed immensely. The drought and resulting poor yields had all been factored into the market with prior price gains, culminating with Friday’s big push higher. Corn and bean markets traded limit down on Monday and recorded very sharp losses for around three days in a row.
I know of one trader who used contrary opinion thinking and bought put options on corn that Friday that prices were pushing higher. He made a good deal of money that next week. )
–For bulls, it’s important to remember that markets are the most bullish at the very top–it’s downhill from there. Recognizing the clues that suggest a top is in place in the grains, during a weather market, is especially difficult, as technical indicators can become less reliable. Thus, being content to catch a bigger part of a price trend should be the goal of the trader. Don’t be disappointed if you did not capture all of a price move in grains in a weather market. Becoming greedy and trying to do just that will usually get a trader into serious trouble.
–Pyramiding trades or “averaging down” losing trades is a no-no. (Unless, adding futures positions was in your initial trading plan of action.) One cannot believe the extreme temptation there is to add to winning positions when a profitable trade is occurring in a weather market in grains. Being long soybeans and hearing a bullish weather forecast heading into the weekend certainly invites adding a couple more long contracts on Friday. But that is pure greed kicking in. Greed in trading is not good.