La Niña typically affects a broad range of farm commodities
Often called the “Cool Sister” of El Niño, but not because she is the “hip” one. Due to cooling waters off Peru’s coast that can extend west to Australia, she can bring above-average rainfall to The Land Down Under. She can also create potential flooding conditions to Southeast Asia. The cooler and more extensive these waters are, the stronger this phenomenon can be. A weak vs. a strong La Niña can have huge global impacts on commodities. It also increases price volatility in everything from natural gas to cocoa, sugar, coffee, cotton, grains and oilseeds.
Some La Niña events can deliver global weather issues for coffee crops. We changed our view 3 weeks ago for our clients who subscribe to our WeatherWealth newsletter. Our outlook became more bearish as we saw a shift in the pattern for extensive rainfall in Brazil’s coffee region. This particular La Niña is creating a bull market in sugar, and prices have been soaring. Parts of Brazil (e.g., São Paulo) have a greater possibility for drought, and Argentina’s croplands can become more arid. Drought is also more likely in Thailand.
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Sugar is in a bull market due to La Niña
As is the case with El Niño, the Cool Sister can have an major impact on global commodities. However, La Niña’s influence is often the opposite. Keep in mind that not each La Niña event is the same. Furthermore, the media coverage often errs by looking at only a couple of cases. For example, the chart below shows higher global food prices during the 2010-2012 La Niña. To professional statisticians looking at 50+ years of historical cycles, ONE case to look at, is not enough.
There is one mistake that many commodity traders and news services make. They do not take into account other global teleconnections and phenomena. These are Sea Ice, Climate Change and weather variables thousands of miles away. That is how Jim Roemer makes long range weather predictions that support trade suggestions for our clients.
The chart above shows the historical movements of sugar prices during, or just after, the most impressive La Niña or El Niño events. One can see that most of the bull markets in sugar occur during El Niño events and not always from the sister who cools the waters. This is because India (the second largest sugar producer/exporter after Brazil) tends to have crop reductions during La Niña events. This year, however, a three month drought in São Paulo and longer after-effects in Thailand, from the last El Niño, have reduced global sugar supplies.
Above, the dry weather you see in Brazil during the last three months has been reducing the nation’s sugar crop. What’s next? Will corn and soybeans be affected, and result in a further bull market?
Stay tuned and subscribe to WeatherWealth
Global wheat production is reduced in 70% of La Niña cases
Higher wheat prices, longer term, and big crops in Australia, following devastating El Niño & Climate Change problems may be a blessing for Aussie wheat farmers in the months ahead.
Wheat is one of the few commodities that tend to “consistently” see global weather problems that reduce supplies.
After multi-year record global crops and poor prices, this market has finally begun to turn the corner. We began advising clients several weeks ago about a developing drought in Russia where fall wheat plantings would be affected, as well as drought conditions moving into the US Plains. Wheat prices have soared more than 15-20% in recent weeks, but will remain volatile and more difficult to trade due to the “demand side” of the equation remaining weak.
Back in December, I alerted clients to a strong west African Harmattan wind. It had the potential to cause quite a bit of damage to the mid-season cocoa crop in Nigeria and Ghana. I’ll get to El Nino, below.
CV and demand destruction not culprits.
Temperatures were above normal and rainfall below normal since December. However, over the last 2 weeks, that situation has changed. Coronavirus and demand destruction aside, The images depict greater than normal rainfall. Despite coronovirus and demand destruction, this has contributed to the recent slide in cocoa prices.
Most computer models suggest La Nina conditions by this fall or winter. This will have major impacts on global commodities. El Nino type conditions in the spring can improve, not devastate, the west African cocoa crop. This is contrary to what you might here from other meteorologists who cover these markets. One can see the above normal rainfall in west Africa recently. Eastern areas of Africa have been suffering from flooding and a Locust outbreak.
The dark blue line in the above chart projects all computer models for a possible La Nina by autumn. However, I have my doubts right now if this will happen.
Notice all the warm waters west of the Dateline and to the east of Australia. This is one signal that El Nino conditions are still present. This phenomenon brought hot-dusty winds to west Africa last winter. It is actually a saving grace for much of west Africa’s cocoa crop this spring.
The SOI index, also a measure of La Nina or El Nino conditions, is negative again. This, too, strengthens the argument that occasional El Nino conditions still exist.
It all depends on how you look at price. Based on the London gold “afternoon fix” the all time high was on September 5th and 6th (both days) in 2011. That price was $1,896. In the recent run up, the highest London p.m. fix was $1,683.65 on March 6, 2020. When the financial markets took a nosedive in unison, the p.m. fix got as low as $1474 today, March 18th.
However, if you have the perspective of a currency other than the USD, the picture is different. Accordingly, the charts below show the long term history of gold priced in US Dollars, Canadian Dollars and British Pounds.
The Price of Gold Expressed in Different Currencies
But wait! A currency’s price is in terms of another currency.
How many Rubles is a Shekel worth? One Canadian dollar will cost you how many Australian dollars? How many Rupees would you get for a Peso? I think you get my point.
Normally, the price of gold is denominated in US Dollars per troy ounce. But, if the dollar is not your base currency, that ounce of the yellow metal has a differently stated value. Therefore, because a currency price pairs fluctuate, the historical gold charts differ slightly.
The “apples to apples” rule implies gold’s evaluation can be ounce based, using another precious metal. Consequently, bullion traders and investors have always followed the gold to silver ratio (GSR) and the gold to platinum ratio (GPR).
Apples to apples thinking, means that gold is at its all time high when measured in ounces of silver.
Because silver crashed more than gold crashed, gold ounces increased in value when measured in ounces of silver.
In this month’s market, after the multiple crashes, one ounce of gold is worth over 120 ounces of silver. At the end of 2019 it was 85 to 1. Historically, the jump from 85 to its recent peak of 123.78 is a record for this ratio. Whereas, the chart below shows a much longer time series.
15:1 was the lowest level for the ratio in U.S. history, as it had been legislated into the Mint Act of 1792. The concept is as old as the hills. The Roman Empire had declared a 12:1 relationship for the pair. Three millennia earlier, during the reign of Pharaoh Menes (the first king of Egypt), it was written in hieroglyphics, that 2.5:1 was the GSR. According to Marshall Gittler, head of investment research for BDSwiss Group, the gold/silver ratio is “…perhaps the longest-running price series in financial history…”
Regarding this week’s markets, the conclusion is that gold crashed, or didn’t crash, depending on your point of view. Do we liken apples to apples, or apples to bananas?
Last week (3/8/20) our own Jim Roemer, who publishes this blog, alluded to a possible immanent bullion price collapse. His commodity service and WeatherWealth newsletter focus on weather and climate fundamentals in agricultural and energy markets. Weather does not usually impact metal prices. However, in these volatile times, with the global economic woes rippling throughout the macro-marketplace, everything is connected.
A blog that I posted here in 2018 focused on some not-so-obvious ways that the weather can affect markets. One of the examples I wrote about makes a connection between a hurricane and gold.
The warming Arctic this winter has resulted in incredibly cold weather in parts of Europe and Northeast Asia. Another symptom has been unusual March snowstorms in the Northeast U.S., the likes of which are unprecedented. Although four Nor’easters have clobbered the Eastern U.S., I do not agree with the forecasters who attribute this to La Niña.
Once again, the “warming planet” signals are the handwriting on the wall. They read “the Arctic is warming” and “the Atlantic ocean temperatures are rising.” As far as the energy markets are concerned, the UK natural gas futures contract reacted extremely to the cold weather. The U.S. has not had nearly the consistent cold winter as observed in Europe. The negative NAO. Index (warm block near Greenland) and warming near Alaska (negative EPO) have resulted in this “Beast from the East”. For more information about this incredible European cold and some changing feelings about global warming, Please click the following link: Here
a rare coincidence of the NAO and EPO indices
WHEAT PRICE COLLAPSE DUE TO SUDDEN SHIFT IN U.S. PLAINS DROUGHT
Wheat prices have had a steady climb during January and February, as the chart reveals below (right). However, it usually takes some other weather disaster somewhere in the world to have a longer term bull market in wheat prices. Two fundamental factors are brewing in the world of wheat:
a) The U.S. has not been competitive in the world market, and
b) Russia is sitting on huge global stocks.
These realities began to increase wheat market volatility long before we changed our forecast views presented to private clients on March 15th. We issued a heightened alarm for a potential easing of the Plains drought.
Due to weather factors not related to La Niña, there has been a precipitous drop in wheat prices.
CLIMATECH (below) shows how the present La Niña is similar to 1955. Back then, “normal” dryness continued in the Plains wheat areas (red). Based on these teleconnections below, this should have happened. However, computer models, along with our forecast, began changing on March 15th. This prompted us to alert private clients about a potential change in wheat price direction. If you would like more information, please email us at
As wheat prices have taken it on the chin, one of the lone bull markets in agricultural commodities recently has been in cocoa. Dry, hot weather did cause some minor reduction in the west Africa cocoa crop this winter. This is quite is unusual for La Niña. However, the main reason for the bull move is far too many short futures positions. This high level of commercial hedges are bumping up against rising global demand. In addition, there is press coverage pointing out that cocoa farmers in Ghana will see lower production in coming years due to the “illegal gold mining boom.”
Here is an excerpt from the current issue of National Geographic:
“Gold mining has always been a part of Ghana, from the ornate jewelry of the Ashanti kings to British colonization. In the last several years, largely unregulated galamsey (informal, illegal) mining has ramped up, due in part to Chinese investors who bring in sophisticated equipment and a lagging economy that makes the prospect of striking gold too sweet to pass. These often illegal operations can result in contaminated water, deforestation, and a rise in violent crime.”
“In 2011, Ghana produced a record-setting amount of cocoa, weighing in at over one million tonnes. Since then, as illegal mining steadily ramped up, cocoa production has trended downwards, with a drop to 740,000 tonnes in 2015.”
For the full, interesting article about this from National Geographic, please click here
Best Weather is pleased to welcome our guest blogger, Scott Mathews, who tells us about weather’s role in economic events.
Credits for narrative and graphic content appear at the end of this blog, below.
1857 – How a hurricane contributed to an economic panic
1982 – How a blizzard caused a “flash crash” in short term interest rates
2018 – What could happen next?
The recent announcement about an upcoming auction of gold salvaged from a 19th century shipwreck bears an interesting tale of how an economic crisis was spawned by a hurricane.
Wreckage from the SS Central America, the so-called “Ship of Gold”, was discovered in 1988 at a depth of 7,000 feet off the Carolina coast. As the recovery operation progressed, half of the payload was sold in order to pay back creditors involved with the project. That accounted for about $50Million worth, but the rest of the treasure has been tangled up in years of bickering among law firms and insurance companies. What’s left will be displayed in California at the Long Beach Convention Center (Feb. 22-24), and will be sold in early 2018 for an estimated additional $50Million,depending on market prices.
On the auction block will be 45 gold bullion bars, 3100 gold coins, 1000 silver coins and over 80 pounds of gold dust, as well as an assortment of nuggets.
What does this have to do with the weather causing a crisis?
Tales of both success and ruin from the great 1849 California gold rush are the topics of songs, novels and movies. There were fortunes made, for sure, but there were also hard luck outcomes for many who gave up all, in hopes of getting rich. Some have said that the real winners were the operators of saloons, bordellos and flophouses, as well as the sellers of hardware, dry goods and mules. The gold mined there in the early 1850s injected a powerful stimulus into the US economy.
The Panic of 1857
California gold was consistently shipped back east. The cargo hold of the SS Central America contained a sizeable stash, roughly 10 tons. At that time, the prosperity enjoyed in the US was partially hinged on that stream of wealth flowing from the gold rush.
The flow began to slow down in the mid 1850s, and on September 12, 1857, when that New York bound steamship sank in a violent hurricane, the first economic domino fell. The loss of that long awaited gold shipment was such big news, that the telegraph operators sent “instant messages” that halted thousands of deposits, payments, acquisitions and other dealings across the country.
The banks had invested in businesses that were failing, and this was causing the American people to panic. Investors were losing heavily in the stock market and railroads were unable to pay their debts…
…Land speculators who had counted on the construction of new railroad routes were losing money. People feared financial ruin, and ran to the banks to withdraw their money. However the banks did not deal in paper money, the banks dealt in silver and gold.
Then the panic became global from the perception that the supply of precious metal money was drying up. There was no real recovery until after the Civil War, a decade later.
Fast Forward to Supply Side Economics in 1982:
How Bond Traders “Got Snowed”
The supply of money has been, and still is a main driver in recessions and in growth periods.
A huge plunge in short term interest rates baffled bond traders one afternoon in April 1982. This was during the Reagan administration when “supply side economics” was the buzz phrase du jour, and guessing the money supply number was one of Wall Street’s favorite extra-curricular guessing games.
The aggregate known as M1 measures all “circulating” cash, mostly held in checking accounts. For a while, the money supply was considered to be the pulse of the economy. The expansion and contraction of M1 told traders how the Fed would, or might, react in response to short term credit needs.
That puzzling M1 deficiency which spooked the bond traders that afternoon wasn’t explained until the following day:
It appeared that a rare spring snowstorm was the culprit.
The Associated Press reported that the April blizzard “swept from Ohio through New England, and brought travel to a virtual standstill in cities such as Boston and New York.” A snowstorm of such ferocity was unprecedented at that time of year.
The 4/6/82 storm had been so unexpectedly severe in the Northeast, that the U.S. Postal Service experienced massive delays in mail delivery, and transportation disruptions impacted commerce.
So, how did this affect interest rates? Billions of dollars in Social Security checks didn’t move through the postal system as normally anticipated.
Millions of recipients got their checks late.
Hundreds of thousands weren’t able to get to the bank.
This might seem odd today because direct deposit and electronic banking now insulate the movement of money from the elements. When that M1 number was released it was several billion dollars short of expectations, signaling an immense lack of available cash; this in turn, implied the Fed would have to add reserves, and ease credit by lowering interest rates.
The following week, after all those checks had been received and deposited, the numbers went back in line with predictions again.
Economic analysts must have been aware of the blizzard as the major headline story the previous week, but none of them had “connected the dots” when making their M1 forecasts. The moral of this tale is that weather not only impacts the economy, but it can be “last week’s weather” that takes investors and traders by surprise.
Did I mention that money supply figures were, and still are, released every Thursday afternoon for the calculations based on the previous week?
In some bond departments during the Reaganomics era, the trader with the farthest-off “guestimate” had to buy refreshments, and transportation home, for everybody in the weekly M1 pool:
What glitch could weather have in store for markets in 2018?
This is not going to be a prediction… just some “food for thought” about how the 21st century version of our theme might play out. In the case of our historical anecdotes, technology was the key.
In 1857, using of a side-wheel steamer to transport precious metal assets was probably an accident waiting to happen. What was the alternative? Certainly not railroad or stagecoach, because they would be too conspicuous and too tempting for bandits. So, shipping had to be… by ship.
As for the 1982 Social Security checks being delayed in the US mail, it was also a transportation issue, since the checks traveled their greatest distances by truck.
In 2018, the transportation of data is our Achilles heel. How could weather impact that process?
It’s all about power outages. Widespread outages of long duration would put electronic commerce and banking at great risk. After back-up batteries have died, and after fuel for back up generators has been depleted, then the money flows would slow, and even stop in many venues. We know that power outages can be triggered by weather. Extreme heat waves can stress the system from excessive cooling demand…
…wind and ice storms can bring down power lines,
…and lightning strikes can compromise generation stations.
You might think we’ve always been aware of such possibilities. Your assumption is that the engineers have “hardened” the facilities with preventive and reactive measures. All of that is true. However, in this era we have a new actor who could take a cue from a severe weather event. He might seize an opportunity to bring down the grid as well as the economy.
Enter the Cyber Criminal
On the written page, on stage and on screen, the burglar strikes at night. He takes advantage of darkness and diurnal habits of his victims in order to increase his chances. He gets “coverage” from them.
In the 21st century, the cyber terrorist looking to cause havoc might strike at any time. Yet, if the grid is already suffering from a weather-based outage, his mission might prove even more insidious. The weather event will give him “coverage” as well.
If that doesn’t scare you out of your wits, read this book:
Just so you know, in an interview on his tour for this book, Ted Koppel said, “We are frightened enough that my wife and I decided to buy enough dried food for ourselves, our kids and their kids.”
Are you interested in stocking up for survival? Don’t forget that you might want to keep some hard assets for bartering purposes. It doesn’t hurt to have some gold and silver coins, but you need to get them before the internet crashes. Oh, and remember, “no internet” means “no crypto currency”.
If you want to stock up on precious metals, in either coins or bars, be careful. The field is crawling with counterfeiters. The criminals are getting better at fooling the experts. The most clever ones seem to be in China.
“We do not inherit the earth from our ancestors, we borrow it from our children”. – Native American Proverb
“You may delay, but time will not.” – Benjamin Franklin
There’s a bit of “Prospector” in all of us:
Music credits: Days of ’49 performed by Toein’ in the Dark. – YouTube video published October 21, 2012
Painting “Death of the SS Central America” by Gary Hanna
Photo display of gold bars and coins: Monaco Rare Coins, Newport Beach, CA 92660
“The War of Wealth” – 1896 Broadway play by C.T. Dazey – poster copyright by The Strobridge Lithograph Co., Cincinnati & New York, 1895
Photo of Ronald Reagan: “How Reagan Sowed the Seeds of America’s Demise” – by R. G. Price – RationalRevolution.net
Ship of Gold in the Deep Blue Sea, by Gary Kinder, Grove Press, New York, 1998.
“Hurricanes and Equities: Cross-Market Opportunities” (2009) by J.S. Mathews – published on CME Group website
Koppel, Ted – “Lights Out: A Cyberattack, a Nation Unprepared, Surviving the Aftermath” – Crown Publishers (2015)