Special Report: Western Drought Watch: ‘Weather extremes appear to be increasing’: Drought conditions send oats, wheat and other commodities soaring

Drought conditions in the U.S. and elsewhere are behind the tight supplies and price gains for a wide range of commodities, including oats, wheat, soybeans, coffee and even livestock.

“Weather has always been a source of uncertainty in agriculture,” says Taylor McKenna, analyst at Kopernik Global Investors, and “weather extremes appear to be increasing.”

Among the regions hardest hit by drought this year is the western third of the U.S., extending across the northern plains and Canadian Prairies, says Dale Mohler, AccuWeather senior meteorologist. “At one point, areas from the northern Rockies to the Dakotas were 10 [to] 15 inches behind normal” in rainfall — and in the far western and southwest U.S., the drought has been long term — just over a decade.

Read: California’s ‘atmospheric rivers’ bring limited rain relief — a look at the Western drought by the numbers

Mohler says the commodities primarily impacted by the drought include wheat and smaller grains such as oats and barley. Drought has also hit the coffee and sugar growing areas of South America, northern corn growing areas in Brazil, and the western wheat growing areas in Russia, he said.

Among those, oats have seen the biggest percentage gain this year, with futures prices

up over 80% as of Oct. 21. Coffee

is up 59% and sugar

up 22%, while wheat

has gained 16% and corn’s

added nearly 10% year to date.

Oat prices have “skyrocketed” as a result of drought in the Northern Plains, says Darin Newsom, president of commodity analysis provider Darin Newsom Analysis. And this year’s production of U.S. wheat planted in the spring is expected to be the smallest in a decade due to drought, he says, adding that there’s a similar situation for spring wheat expected across the Canadian Plains. In October, the U.S. Department of Agriculture lowered its estimate for domestic hard red spring wheat production by 8 million bushels to 297 million bushels, as drought conditions led to a smaller harvest.

But Newsom pegs corn and soybeans as the two major crops affected by drought, as “both are key food commodities for the world’s largest buyer: China.”

The South American drought, followed by problems across parts of the U.S. and combined with increased demand from China, led to one of the tightest supply and demand situations for soybeans since 2013, according to Newsom. That resulted in high soybean prices around the world, he says. U.S. soybean futures

touched their highest level since 2012 in May, before pulling back to trade over 6% lower for the year.

AccuWeather’s Mohler also points out that drought is often accompanied by heat, and those combined conditions put “stress on crops and livestock,” so while drought was probably the most stressful weather component, heat was “not far behind.”

For wheat, oats and other small grains, drought and heat combined to reduce this year’s crop by 15% to 30%, compared to more “normal” levels, Mohler says, driving purchases prices for these commodities even higher. Hogs and livestock “typically are stressed and don’t eat as well” during drought and heat, so they are “not as healthy or meaty compared to a normal season.” In the worst cases, animals may die or not be fit for slaughter, he says.

This year so far, lean-hog futures

are up about 10%. Feeder cattle
those being fattened up for slaughter, is up almost 15%, while live cattle
which have reached the necessary weight for slaughter, has gained about 13%.

Lean hogs still “look fundamentally bullish,” and prices for oats and spring wheat, among others, could see high prices again in 2022, says Newsom, adding that there are, of course, key outside factors affecting their outlook, including strength and weakness in the U.S. dollar.

“The bottom line will still be the weather,” he says. After all, “agricultural commodities are, at their core, weather derivatives.”

“‘Agricultural commodities are, at their core, weather derivatives.’”

— Darin Newsom, Daron Newsom Analysis

Even so, given the “craziness seen in stock markets these days,” Newsom said he would “feel safe in commodities,” which are easier to read and invest in because they are closely tied to their real fundamentals. Those include supply and demand.  

For investors interested in commodities, “avoid being a lemming,” he says, referring to a rodent that blindly follows others. “Read fundamentals for yourself, or follow someone who does it, rather than using government reports and headlines.” Commodities are about “supply and demand, and this can change over time, just not as suddenly as some would have us believe.”

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