Why Drought Could Be a Catalyst for Crop, Cattle Prices in 2021

U.S. farmers are facing a changing scenario for 2021. From wet conditions impeding farmers’ planting decisions in places for 2020, to now drought concerns creeping in, one analyst thinks weather could be a major market mover in 2021.

“The real focus, I'd say by early March will shifting to our spring planting,” says Bob Utterback, of Utterback Marketing.

He says planted acreage will play a role in the markets, with acreage possibly exceeding expectations. Between enticing prices and drier weather conditions that could allow for seamless planting, Utterback thinks acreage could expand either in the northern Plains or the South. However, the bigger event for the markets could be dry conditions expanding, especially with tight supplies.

“The thing that really catches my eye is while we could talk acreage increase, I think USDA is way too high with 50.5 soybean yield starting out. So, the real risk I think is not the demand side, is not the acres, it's the yield variance,” he explains. “And if we get anything below 49.5 or 50 [bushels per acre] U.S. average beans yields per the forecast in June and July, I think the implied volatility will drive the out of the money call options through the roof.”

Utterback says the main question floating around the markets today is how much higher prices need to go before demand rationing could occur. Whether it’s livestock producers shutting down because of high feed costs, or ethanol plants shuttering production, demand issues could eat into commodity prices if demand issues surface later this year.

Row crop farmers aren’t the only sector in U.S. agriculture concerned about drought. The U.S. drought monitor shows key cattle producing states are also seeing dry conditions expand, an issue that could play into the cattle markets this year.

“It's going to be a huge influence,” says Don Close, a senior analyst, Rabo AgriFinance. “While we certainly saw some effects of that is the western half of the US has been under drought conditions for almost a year now, the real critical component of this going forward is not only the dryness in Nebraska and Kansas, but is if we see this dry weather move across the southern states and goes across more of Texas and Oklahoma and then into the southeast complex. That could really be the catalyst that stimulates an escalation in liquidation.”

Watch the full U.S. Farm Report marketing roundtable with Don Close and Bob Utterback.




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