Grains

It is January, 2012. Since I expect increasingly unstable weather I am interested in the grains as an investment.

This, from Grainguide on grain futures, makes me interested in timing oats or one of the wheats in order to capture their seasonal bullish periods:

The following table shows the typical national average planting months for specific grain markets (December contracts used for all except Soybeans, where the November contract was used) versus the rest of the year:

Planting

Months

Cents Gained

Rest of Year

Corn

Mar/Apr

26 1/4

-182 1/2

Oats

Apr

38 3/4

-603

Soybeans

Mar/Apr

163 1/4

-535

CBOT Wheat

Sep/Oct

74 1/2

-168 1/4

KC Wheat

Aug/Sep

145 1/2

-419 1/2

As can be clearly seen, field crops tend to rise going into planting. All of the commodities in question tend to increase in value, as the market-place begins to appreciate all that can go wrong with the coming crop. After all, nothing can grow with out first being planted, so planting must go smoothly for the crop to develop to its full potential. Hence, since this is the first step the production of grains, it is the point when the crop is the most vulnerable to damage, and hence prices tend to factor in a “risk premium” to help ensure that grain is rationed throughout the year.

The second destruction of the grain crop comes during pollination. All the grains must pollinate in order to produce the grain (seed, beans, ears, etc) that are the product which farmers are after. Pollination requires certain enviromental conditions, and extremes in temperature or precipitation can cause yield stiffling damage to the crops. Given the risk of pollination, and its far reaching impact on yields, the marketplace tends to build the “risk premium” into the price of grains ahead of pollination. The following table shows the typical national average pollination months for specific grain markets (December contracts used for all except Soybeans, where the November contract was used) versus the rest of the year:

Pollination

Months

Cents Gained

Rest of Year

Corn

Jun

89 1/2

-253

Oats

Jun

102 1/2

-666 3/4

Soybeans

Aug

93

-464 3/4

CBOT Wheat

Apr

162 3/4

-256 1/2

KC Wheat

Apr

202 1/2

-476 1/2

As can be clearly seen in the above table, Grain futures tend to rally going into pollination. However, as this milestone is crossed and supply becomes more certain, prices fall.

The final obstacle between the stages of buying seed, and selling grain is harvest. This third and final destruction of the grain crop occurs as traders, producers, and consumers worry that conditions are not hospitable for harvest and hence harvest will be delayed and yield will suffer. The following table shows the typical national average harvest months for specific grain markets (December contracts used for all except Soybeans, where the November contract was used) versus the rest of the year:

Harvest

Months

Cents Gained

Rest of Year

Corn

Oct/Nov

31 1/2

-195

Oats

Oct/Nov

24 1/4

-588 1/2

Soybeans

Oct/Nov

-40 1/2

-331 1/4

CBOT Wheat

Jul/Aug

-57 1/4

-36 1/2

KC Wheat

Jul/Aug

-49

-225

Again, it is clear that the market has historically rallied going into harvest and harvest preparation, as the marketplace increases the price to discount the likelihood of yield diminishing delays in the crop.

As the crop matures and supply looks more probable in the future, the producer now removes the risk premium from the market. There is fear of missing the attractive higher prices of selling their product to consumers who have now met their demand with alternate sources and supplies. Hence, as a crop goes through its natural planting, maturating, and harvesting cycle, the risk premium is built and destroyed depending upon the forces of nature as well as the emotional forces of fear and greed.  When the crop is vulnerable to damage, prices are strong as the price of the grains must reflect the probability of the crop being destroyed. The following table shows the monthly cummulative change in grain prices versus the non-“destruction”, and clearly illustrates the fact that the marketplace builds a “risk premium” associated with the 3 destruction’s of the grain crop each year:

3 Destroys

Months: Planting, Pollination, Harvest

Cents Gained

Rest of Year

Corn

Mar/Apr, Jun, Oct/Nov

147 1/4

-310 3/4

Oats

Apr, Jun, Oct/Nov

121 3/4

-686

Soybeans

Mar/Apr, Aug, Oct/Nov

215 3/4

-635

CBOT Wheat

Sep/Oct, Apr, Jul/Aug

274 1/4

-273 3/4

KW Wheat

Aug/Sep, Apr, Jul/Aug

390

-539 1/4

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