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Climatic factors that influence the formation of El Niño
How El Niño might influence global commodities
El Niño and precious metals
KC wheat prices soar on Plains drought and bullish USDA report
WeatherWealth Trade ideas: Natural gas prices breaking out? A longer-term bearish view in corn and soybeans and short-term bearish weather for sugar and coffee
Introduction
A month or so ago, I felt that maybe El Niño might hold off until the fall or winter. This was because of something we call in meteorology a negative PDO index. However, the Trade Winds in the Pacific are changing, the negative PDO weakening slightly, and more models have now been suggesting El Niño; maybe as early as June or July.
The report below discusses exactly how El Niño is formed, and some potential longer-term weather and commodity trends based on weak vs. strong El Niño events.
I also discuss the explosion in KC wheat again on the Plains drought, why corn and soybeans have headed lower, and have some new trade ideas at the bottom of my report in natural gas, coffee, and more.
Soon, I will discuss Aussie weather and the western Canada drought and possible crop impacts from El Niño, as well as what natural gas prices usually do during summer El Niño events.
The climatic factors that influence the formation of El Niño
El Niño is a complex climate phenomenon that involves changes in both the ocean and the atmosphere. In addition to warmer ocean temperatures, there are several other climatic variables that can help determine the presence and strength of an El Niño event. Here are some of the key variables:
Trade winds: The trade winds blow from east to west across the Pacific Ocean, and they help push warm surface waters toward the western Pacific. During an El Niño event, the trade winds weaken, which allows warm water to slosh back toward the eastern Pacific.
Presently, the Trade Winds are beginning to blow from west to east increasing the likelihood of El Niño conditions forming earlier than I originally anticipated.
Southern Oscillation: The Southern Oscillation Index (SOI) is a seesaw pattern of atmospheric pressure between the eastern and western Pacific. During an El Niño event, the pressure in the eastern Pacific becomes lower than normal, while the pressure in the western Pacific becomes higher than normal. A positive SOI represents normal or La Niña conditions, in which Trade Winds blow from east to west. A negative SOI index depicts El NIño-like conditions.
Notice how almost all models below suggest a negative SOI index deeper into the month of May.
Sea surface temperature anomalies: In addition to warmer ocean temperatures, there are often anomalies in sea surface temperatures that can help indicate an El Niño event. For example, the central and eastern Pacific may be warmer than average, while the western Pacific may be cooler than average.
The warming you see below is greatest near Peru. This is the NINO12 region. Where El Niño forms are critical with respect to long-range weather forecasting and how it might impact global commodities.
Atmospheric circulation: During an El Niño event, there are changes in atmospheric circulation patterns, including the position and intensity of the jet stream. These changes can affect weather patterns around the world.
How El Niño might impact global commodities
El Niño is a weather pattern that occurs every few years when sea surface temperatures in the Pacific Ocean are warmer than average. This phenomenon can significantly impact global weather patterns, which in turn can affect commodity prices in various ways. Here are some of the ways El Niño can impact commodity prices:
Agriculture:
El Niño can cause changes in precipitation patterns, which can lead to droughts or floods in different regions worldwide. This can impact agricultural production and lead to price increases for crops such as corn, soybeans, and wheat. For example, El Niño can cause droughts in Australia, which is a major exporter of wheat, leading to higher prices for wheat globally.
A weak vs strong El Niño event could also have different global implications.
Notice, for example, the cool Midwest July temperature trends if El Niño is strong. This would continue to be a long-term bearish aspect to the corn and soybean market with above-normal yields this summer if El Niño officially forms and becomes strong in the next 2 months.
July temperature trends with a strong El Niño
If El Niño is only weak and the PDO in the northern Pacific Ocean remains negative, then some heat and dryness could affect some western corn and soybean crops this summer.
In addition, the warmer-than-normal weather in some areas might jump-start the natural gas market.
Late spring and early summer rainfall trends with a weak El Niño and a negative PDO
Energy:
El Niño can also affect energy prices, particularly for natural gas and heating oil. Warmer temperatures during El Niño winters can reduce demand for heating, leading to lower prices for these commodities. However, in summer and early Fall, El Niño can also lead to decreased hurricane activity in the Gulf of Mexico. If El Niño is strong enough, this would prevent any major rally in natural gas prices back to $3.50-$4.00
Dairy:
During an El Niño event, there may be cooler than usual temperatures in some regions, which can reduce demand for dairy products such as ice cream and yogurt. This can lead to lower prices for dairy commodities during the summer months.
Certainly, the weather is only one factor in the livestock market, but notice how the last three major droughts in Texas were a key factor in cattle prices soaring. This is because droughts can sometimes cause ranchers to liquidate their livestock herds due to a lack of adequate pasture feed. This can initially put downward pressure on nearby cattle prices as excessive cattle supply hit the market but eventually result in total less supply and a bullish reaction.
Drought affects all aspects of the cattle business. Another reason ranchers have culled so many cows this past year is because of the lack of supply and higher costs.This will lead to a higher overhead environment into next year. Therefore, production costs have increased faster than calf market prices.
I have been bearish corn for a month and caught most of this move down in in the market. If we see lower summer corn prices, this would allow ranchers to boost their cattle herds by reducing feed costs.
If the drought breaks in Texas, there may be a longer-term bearish selling opportunity in cattle futures 6-18 months out.
Cattle do not respond to short-term weather changes, such as the grain market. It would take more than a year for pastures to improve in Kansas-Texas and for ranchers to beef up their herds (pun intended).
Soft commodities:
Coffee: El Niño can lead to reduced coffee production in some regions due to drought conditions. For example, during the 2015-2016 El Niño event, drought in Brazil, the world’s largest, led to reduced yields and contributed to higher prices. However, in other regions such as Colombia, El Niño can lead to increased rainfall, which can boost coffee yields. Right now, however, the market will be focused on Brazil’s harvest weather and whether or not there is a frost scare heading into summer.
Historically, frosts in Brazil do not occur as often with an El Niño event as with La Niña
Coffee has been one of my best markets the last 9 months with numerous winning trades, both in options and futures and from the long and short side. Other factors, such as the rallying Brazil Real and incredible tightness in the Robusta coffee market can play a bullish role. Nevertheless, for now, you can see the drier than normal Brazil weather which is good news for the early harvest and a reason my Weather Spider went bearish earlier this month.
Cocoa: Similar to coffee. El Niño can lead to reduced cocoa production in some regions due to drought conditions. For example, during the 2015-2016 El Niño event, drought in West Africa, the world’s largest cocoa producer, led to reduced yields and contributed to higher prices.
While there are currently concerns about tight supplies in this market and stronger demand, rains like this helping the end of the mid-crop crop and beginning of the main crop have prevented me from becoming overly bullish at these levels.
The greatest weather-related bull markets in cocoa occur not only when there is an El Niño but a negative TSA/TNA (cool ocean temps around West Africa and a negative Indian Ocean Dipole. I will discuss this later, in due time.
Sugar: El Niño can also lead to reduced sugar production in some regions due to drought conditions. For example, during the 2015-2016 El Niño event, drought in India, the world’s second-largest sugar producer, led to reduced yields and contributed to higher prices.
The sugar market has been very tight for months helping to drive prices up 20% due to a lower La Niña-driven Indian crop last year. In addition, there and now worries about El Niño and possible global weather issues.
Look, for example, at the severe stress in Thailand (the #3 producer of sugar cane in the world). What happens with Thailand, Brazil, and Indian weather these next few months will dictate global production and price moves of sugar.
Cotton: El Niño can lead to reduced cotton yields in some international crop regions due to drought conditions. For example, during the 2015-2016 El Niño event, drought in India and Pakistan, major cotton producers, led to reduced cotton yields and contributed to higher cotton prices. However, Texas droughts can often be relieved, and while the weather is only one factor in the coffee market, a rebound in U.S. production may occur this year. That could be bearish prices, later.
El Niño and precious metals
Here are some general trends for how El Niño can impact metal prices:
Copper: Copper prices can be impacted by El Niño events because some of the largest copper-producing countries are located in regions that can be affected by El Niño-related weather patterns. For example, during the 2015-2016 El Niño event, heavy rainfall in Chile, the world’s largest copper producer, disrupted mining activity and caused supply shortages, which led to higher copper prices. However, in other years, El Niño can lead to increased copper production in other regions due to favorable weather conditions, which can lead to oversupply and lower prices.
Gold: Gold prices can also be impacted by El Niño events, although the relationship is less direct than with copper. During El Niño events, there can be increased uncertainty and volatility in financial markets, which can lead investors to seek safe haven investments such as gold. However, El Niño can also lead to economic disruptions in some regions, which can reduce demand for gold and cause prices to decline.
3- Nickel: Nickel is a metal that is primarily used in the production of stainless steel, so the demand for stainless steel is a key factor that can influence nickel prices.
During an El Niño event, the weather patterns can impact global economic activity and trade flows, which in turn can affect the demand for stainless steel and nickel. For example, if El Niño leads to drought conditions that impact agricultural production in key regions, this could lead to lower demand for agricultural machinery and equipment, which can in turn impact the demand for stainless steel and nickel.
In addition to demand-side factors, supply-side factors can also influence nickel prices during an El Niño event. For example, some nickel mining operations may be impacted by extreme weather events such as heavy rainfall or flooding, which can disrupt mining operations and impact global nickel supply.
Overall, the impact of El Niño on metal prices can be complex and depends on a variety of factors, including supply and demand, global economic conditions, and the severity and duration of the weather patterns.
KC wheat prices soar on Plains drought and bullish USDA crop report
Wheat prices continue to soar on the recent drought and USDA report. I was bearish wheat, especially soft red wheat due to improving global weather in Europe, the Midwest, and Ukraine. However, the situation in the Plains has gotten more dire, and recent rains did little to help the crop.
The KC-CBOT wheat spread has soared to historical levels. Notice how long term and especially during and after the harvest, this spread often goes lower, later.
WEATHERWEALTH TRADE IDEAS
NATURAL GAS:
EL Niño events are mixed signals for this market As I discussed above, if El Niño is weak this summer, hot weather in parts of the country may be more bullish. A strong El Niño tends to bring normal to cooler summer weather, especially in Europe. That would be bearish. However, this market is grossly over-sold and we are about to break resistance.
A trader can probably buy July natural gas and risk maybe 15 cents. Confidence is moderate mainly because the short-term weather is not yet bullish, but if we break this trend line one might want to go ahead and buy the ETF BOIL, as well.
WHEAT:
One of the reasons that I thought July KC wheat might be over-bought a week ago is because of this chart below. This was the last severe drought (1996) in the Plains region and wheat prices went lower, deeper into May and June. This is still possible as we get into harvest, but the reality is the Plains wheat crop has gotten worse.
I did mention close to a month ago, a short position in out-of-the-money July CBOT wheat calls but I missed this recent $1.00+ move long KC wheat. Those options (if you did them) are probably still ahead. The drought in western Canada and some dryness in Russian spring wheat areas, I will have to look at. I will discuss what El Niño might fare in these two crop regions, shortly.
CORN/SOYBEANS:
One of my best calls the last month or so, I have been bearish new crop Dec corn and Nov. soybeans for over a month. If you read between the lines of my reports, you might be up as much as $2,000 a contract short Dec. corn and over $3,000 a contract short Nov. soybeans on increased US acreage and rapid planting.
Nevertheless, we have the whole growing season ahead of us and these markets may be oversold, so I would NOT be short in the hole. I have had higher confidence hedging 2023 production and being short out of the money calls in these markets, than in wheat.
If we do not have a summer Midwest drought, then Dec. corn will go to $4.00-$4.50 and Nov. soybeans $10. This is what I expressed a month or so ago. If we have only a neutral or weak El Niño, this could result in a return of dryness in heat in the western corn belt this summer and temper my bearish attitude the last month or so. Stay tuned.
COFFEE
The Brazil Real breaking out has kept this market from falling. However, drier weather for the Brazil harvest and a potential rebound in 2024 production keep me neutral to bearish longer term. My Spider went bearish again last week. While El Niño might cause some global weather problems deeper this year, without a frost, it is possible prices could drop 10-15% in the next few months. One other area to watch will be Colombia and whether their crop can recover from flooding and lower La Niña-type production in 2022-2023.
A real conservative trade might be buying the December $1.50 coffee put or selling the December $2.00 call (VERY LONGER-TERM TRADE), which is trading near 10 cents or $3,700 a contract. The first sign I see of any frost scare or major weather problem, I would tell you to exit that position.
SUGAR:
This market is over-bought by the recent “squeeze” situation brought on by tight supplies from lower 2023 production in Europe and India.
While El Niño weather, slightly higher crude oil prices, and a higher Brazil Real could be longer-term bullish, dry weather for the Brazil harvest could be a bearish short-term factor soon. If you are long the ETF (CANE) from a few weeks ago with small profits, I certainly would risk a break-even stop. My bias is to sell rallies in this market for now.
COCOA:
Swollen shoot disease in Ivory Coast, tight supplies out of West Africa, and talk of El Niño may support prices again later. This may only be a short-term blip sell-off in an overall bullish market. Nevertheless, I have been reluctant to advise in this market for months until I see legitimate major global crop weather concerns.
Introduction: Market Market interview about El Niño, or not
The negative PDO and warm NINO12 relationship in weather forecasting for commodities
The heat content of global oceans soaring
Historical snowy winter for the Western United States: Implications for the corn belt summer weather?
More weather problems for global sugar?
In the face of the Plains drought, what have wheat prices done historically?
India’s record April heat. Any implications for the summer monsoon?
What happens to soybean prices following the worst Argentina droughts?
Introduction:
This is a very detailed report. I will have a brief update Wednesday night or Thursday.
The report has a recent interview about El Niño and global weather extremes (see below). El Niño may develop faster than I thought a month or two ago, but we need to see the SOI index go negative.
I also show where global weather extremes are located and suggest some possible implications for summer weather (though it is early).
Teleconnections such as the -PDO and warming at NINO12 will be critical for late spring and summer weather.
My highest confident trades recently were of course the homerun long coffee a few weeks ago, still friendly sugar (though it is over-bought) and bearish July KC wheat on any further rallies.
Enjoy,
Jim Roemer
PLEASE CLICK ON THE ABOVE IMAGE for a YouTube video on my website
(about 30 minutes long, if you are interested).
The negative PDO : warm NINO12 relationship to forecast commodity weather
The cooling off the coast of California was inspired by the record floods and snows and atmospheric rivers last winter. Although it isn’t “written in stone,” I present some possible late spring and summer weather forecasts from my ClimatePredict software.
Notice how my program suggests a return to dryness over the Plains wheat areas, after this week’s big rains. However, I may have to second-guess this model and predict a slowly improving May weather pattern for Plains wheat.
Notice how warming at NINO12 and a -PDO may suggest a warm U.S. summer. If this occurs, it would put the breaks on natural gas prices, but not until deeper into the spring or early summer. I also see weather problems for Thailand sugar and possibly the western corn belt (stay tuned).
The heat content of global oceans is the highest in recorded history
So… you think the planet is not warming and it is just a normal cycle? No way, think again. This is what global ocean temperatures have been doing since 1960. While everyone and their dog is talking about El Niño due to the warming ocean, the SOI index needs to change.
Historical snowy winter for the Western United States: Implications for summer weather in the corn belt?
There is no reason to trade corn and soybeans on a longer-range forecast, 2-4 months from now. Mostly, I mentioned that without a major drought this summer, corn prices could go to $4.50 and soybeans $11 per bushel. Currently, the market is looking ahead to the end of La Niña and a potential overall bearish grain outlook.
Nevertheless, I can look at a million different studies until I am blue in the face. The last thing I want to do is confuse everyone.
Both the study towards the top of this report and this one do portend some potential weather problems this summer for the western corn and soybean belt, yet again!
Projected July-August temperature trends following record snowy western U.S. winters
Projected July-August rainfall trends following record snowy western winters
More weather problems for global sugar?
Sugar prices soared last week on tight supplies, wet weather for the Brazil harvest, and worries over El Niño coming. However, the BRAZIL weather pattern appears a bit drier now, after recent rains. Hence, it is possible this may ease some of the short-term concerns in the market.
So what other weather events may drive sugar prices higher or lower this summer and fall? Of course, the Indian Monsoon and also crop conditions and weather in Thailand (#3 biggest producer of sugar cane). Notice below how warming a NINO12, combined with a negative PDO in the North Pacific suggests dry weather issues for Thailand.
In the face of the Plains drought, what have wheat prices done historically?
While the U.S. wheat crop is in fair to poor condition, seasonally, look what happens to wheat prices as we go into the late spring. In three of four cases, prices went lower “later.” The big caveat will be Russia’s war on Ukraine, and how weather and crop conditions fare the next few months in the U.S. Plains, Europe, and Russia.
What happens to soybean prices following the worst Argentina droughts?
Ahhh..stay tuned. Right now, demand has been terrible and has pressured the market. We have basically a bearish longer-term view. But how so? After all, some of my studies above talk about a hot-dry summer.
India’s record April heat. Any implications for the summer monsoon?
Stay tuned for further studies as the weather in India this summer will affect the cotton, rice, and sugar markets.
WEATHERWEALTH TRADE IDEAS
Sugar: Breaks long-term resistance but Brazil harvest weather improving more than expected
Sugar prices took out long-term resistance last week. The market is way overbought with respect to specs. Dry weather in Brazil again is an excuse for a partial sell-off, but if it turns wet again by May and Thailand and India have crop problems, the market should remain bullish.
Wheat: Spreads between KC and CBOT reverse as important rains to hit the Plains this week
There is talk again of possible issues with the export corridor of grain from Ukraine due to Russia’s war. My bias is to sell rallies in KC wheat rallies on this, or to sell July futures or out-of-the-money call options in wheat (I actually said this last Wednesday).
I like looking at markets that are over-bought or over-sold. There is, however, a short position right now in wheat, a poor U.S. crop, and the Russia-Ukraine situation. Otherwise, my spider (see below) would be at least a -8 to -10.
I actually sent a flash update late Tuesday to exit any long wheat positions and that my bias was more bearish. Wheat collapsed mid-late week some 30-50 cents off the highs.
Monday evening crop condition report should show wheat crop ratings fall even more. So… why sell into it? The best rains in months and possibly more in 11-15 days, plus my study above about historic wheat price action.
Corn: Original bullish December Spider turned more bearish in the middle of last week
This week, cool weather will slow corn planting, but it does not appear enough to cause major concerns. The demand side of the equation has been hurt recently. As we get deeper into spring and summer I will have higher confidence advice. About a month ago, I did mention for farmers to hedge some of their 2023 production. However, it is early, and do not advise “selling in the hole” right now.
Cocoa: Continues to rally on worries over El Niño and West African farmers not selling much of their crop
Concern about the quality of some West African cocoa crops has limited any declines in cocoa prices. Cocoa farmers continue to struggle with the lack of fertilizer and pesticides as the war in Ukraine has limited Russian exports of potash and other fertilizers worldwide.
Demand has also been strong and there is talk of course for El Niño, which is often bullish prices (later). This is usually one of my best markets, but I did not call this price increase because it is not weather related. My focus has been much more on the natural gas market last winter, the previous South American drought for soybeans, and especially the coffee market.
We hit resistance last week in cocoa and the weather is generally beneficial for the start of the main crop.
Soybeans: Ideas of a big 2023 crop as La Niña is gone, plus China demand concerns pressures November prices
I mentioned my more bearish attitude in November soybeans some 30-40 cents higher than this a week or two ago. While some of my research does suggest some heat and dryness in parts of the Midwest grain belt this summer, until I see actual U.S. problems, my bias recently was to sell out of the money-deferred call options long-term. Here too, I would not do this on a 50-cent break now.
The recent collapse in prices is due more to export competition from Brazil and poor demand rather than the weather.
Coffee: Recommended taking big profits around $1.94-$2.00 on long positions early last week. Now what?
Over the last 8-10 months if you took my advice in call options, option strangles, and occasionally futures, potential profits on at least three to four trades were well over $7,000-$11,000 a contract. By far my best market over the last year, I want to wait for now for any new advice.
I also suggested long the ETF (JO), 2-3 weeks ago but to take profits of 7-15%, early to mid last week.
Will the 2023-24 crop later this year have a frost, drought, etc.? Stay tuned. Tight supplies continue and global weather problems in Indonesia and Colombia helped to ignite this market a week or two ago. The weather in Brazil, for now, is mixed.
Natural Gas: LNG exports and cool late April weather are supportive vs huge global supplies that are bearish
I can explain my view with this picture. Wait until May and June, if it gets hot, I will recommend a strong buy.
HELPING YOU MAKE THE BEST INVESTMENT DECISIONS BASED ON THE WEATHER
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