As far as natural disasters go, few are more devastating than a hurricane. High winds, storm surge, and heavy precipitation can create uninhabitable living conditions. They are also capable of rendering crops useless and sending shockwaves through the ag markets.
Hurricanes strike the Southeast region of the U.S. almost every year. Disruptive weather patterns are commonplace from June through November 30, a six-month period known as the Atlantic hurricane season. In 2018, two powerful hurricanes, Florence and Michael, struck in September and October.
Ag Markets Withstand the Impact of Two Hurricanes
Like Irma and Katrina in previous years, Michael and Florence brought the U.S. Southeast catastrophic winds, heavy rain and devastating storm surges. Florence hit the Carolinas as a modest Category 1 storm, bit Michael made landfall classified as a fierce Category 4 hurricane, the strongest to hit Florida in 80 years.
The arrival of Michael threw Southeastern ag markets into chaos. According to CNBC, the sector-wide devastation stemming from the hurricane was extensive. Here are a few of the extreme examples of the destruction:
- Aggregate damage from Michael was estimated to be US$1.3 billion for the Southeast region alone.
- Alabama and Georgia were hardest hit, specifically cotton and pecan farming operations.
- In Georgia, more than 2 million chickens and 100 chicken houses were lost.
- Florida timber, peanuts, and cotton experienced widespread damage.
In the trading sessions surrounding Michael’s landfall, the pricing of ag futures received a bullish bump. Speculators and producers alike rushed to protect assets or benefit from the volatility facing a wide variety of ag markets. Specifically, cotton, corn, and soybeans experienced heavy action:
- Cotton futures on the Intercontinental Exchange (ICE) rallied 1 cent immediately following the news of Tropical Storm Michael being officially upgraded to Hurricane Michael.
- Following Michael’s landfall, March 2019 corn futures gained 1.94% for the 11 October 2018 trading session.
- March 2019 Soybean futures posted a weekend-interrupted three session gain for 11 October to 15 October of 4.38%.
Although Michael brought the more severe consequences of the two storms, Florence influenced the lean hog market substantially. Making landfall in North and South Carolina during September, Florence threatened a region responsible for nearly one-eighth of aggregate U.S. hog production.
The anticipation of Florence’s arrival brought robust trade to pork futures. The trading sessions of September 12 to 14 featured heavy action in February lean hog futures as the weakened-yet-imminent Florence bore down on the Carolina coast. A three-session rally of 3.08% in February lean hogs highlighted the trading as the ag markets digested the impact and pending fallout of the storm.
The buzz surrounding Florence brought a bit of relief to stagnant pork markets due to the ongoing U.S.-China trade standoff. Facing an imminent 25% tariff increase on American pork imports, questions surrounding the future of Chinese demand for U.S. pork served to undermine valuations. As it became obvious that Florence would have only a modest impact on Southeastern hog production, the action served to stimulate a brief, but welcomed, rally for pork producers.
When It Comes to Natural Disasters, Addressing Volatility Is the Key
No matter whether an earthquake, tsunami, cyclone, or hurricane strikes, a natural disaster creates an abundance of uncertainty. Often, the true impact of one of these events doesn’t become clear for a considerable period of time. Because of this uncertainty, futures market participants are very active during times of environmental challenges. As a result, pricing volatility spikes bring both opportunity and enhanced risk.
Being prepared for the unexpected is a key element of successful futures trading. For more information on how to properly address natural disasters and other X-factors in your trading, schedule a no-obligation consultation with a member of the Daniels Trading team today.