For nearly three months we have touted an end to the northern Brazil coffee drought due to the third consecutive winter (South American summer) of La Niña and other climatic variables we analyze for clients. We were lucky enough to catch most of the big move south a month or two ago from over $2.00 to about $1.55 per pound.
However, coffee prices wiped all of those bullish traders out of the market. They were focusing on other fundamental factors and not the weather. My Best Weather “Spider” was at a very bearish minus nine (-9) during September and October. Recently our Spider became more neutral before the price spike.
Where the Spider Is Now
Notice, for example, the “anti-herd mentality” of a +2 (bullish) due to too many shorts in the market in the last few weeks. Also, see how global crop prospects changed in my view, from a -3( bearish) to neutral to slightly positive (+1). The Spider below was released yesterday to clients before Tuesday’s big price rally.
Two Crop Issues in the Coffee Market
Two crop issues have returned to the coffee market. One is that, even with all the rain in northern Brazil the last 2 months, some concerns from hail damage in Minas Gerais and some trees stressed from the drought a year or so ago and frosts are not producing an excellent bloom. The other problem is the incessant Vietnam rains right in the middle of their harvest. This is typical of La Niña, but the rain presently is particularly heavy. It could lower the Robusta coffee crop.
Source: Jim Roemer and StormVistaModels.
So… how does one trade coffee? The first chance I see of a drying trend for Vietnam and/or hear new reports with respect to the Brazil coffee crop, I will recommend specific JO (ETF) and options positions for traders.
The Antarctic Oscillation Index (AAO Index) describes the difference in sea level pressure between the South Pole and the southern mid-latitudes. When the AAO is positive, a large cold pool of air sits near the South Pole. This is similar in winter to a +AOI (Arctic Oscillation Index). When this happens, a warm winter materializes.
I am not saying the AO index will be positive this winter, by any means. However, the +AAO is one reason why the best rains in weeks will be hitting Argentina over the next few days. This is a major reason for the sell-off in corn and soybeans on Thursday. The U.S. dollar crashing on Friday on a slight reduction in inflation would normally have supported grain prices. Well…it did.
Source: NASA.
Source: Jim Roemer and StormVista.
What Does This All Mean for South America?
The drought in Argentina has been severe in cutting wheat production. While corn planting has been hurt, it is really not until December-February that South American yields could be adversely affected. Think of it like the June-August time frame for the important pollination and pod-setting stages for Midwest corn and soybeans.
Anyway, La Niña does, in fact, result in below-normal Argentine crop production some 70% of the time. For Brazil, the correlation is more mixed. Presently, things could not be better for the northern and central soybean-growing areas of Brazil with a ton of rain in the last month or two. This is the main reason that coffee prices collapsed by 25%.
From my program www.climatepredict.com (Feel free to play around with it), we can see the impacts of a positive AAO index. A positive AAO index, when coupled with La Niña, brings big-time November rains to northern Brazil’s soybean areas and key parts of Argentina. That is what will be happening during the next few days (important Argentina rains).
One of my favorite analogs all year long that had a western corn belt drought, wet Australian weather, and many other global similarities is 1954. We must keep in mind, however, that a warming planet and Brazilian rainforest deforestation make using any analog year prior to 2000 very suspect and often unreliable. Nevertheless, we can still look at some general weather trends.
Analog Years
For example, here are all the analog years since 1950 that had a La Niña event and positive AAO index in November:
Of these years, 7 of 10 cases had a dry December-January for Argentina’s corn, but mixed results for central and northern Brazil. Hence, Argentine corn and soybean production should fall below the trend line over the next few months.
The Midwest grain harvest is almost over and the U.S. dollar is weakening again. This could be a bullish factor for grains deeper into winter (South American summer).
Grain traders will be watching South America very closely for any bullish La Niña signals after the rains end. But… Why have wheat prices been in a downtrend recently?
After all, the Argentina crop was hurt by drought. The Plains is seeing the worst early-season crop conditions in 20 years and Australia’s wheat crop may be downgraded next month due to torrential rains. One can see all the problem areas on the global map, below:
The reasons for the down-trend in wheat are:
1) The Russian wheat crop will likely be even bigger than the USDA estimate.
2) The Ukraine export corridor was re-opened this week following all the crazy Russia-Ukraine geopolitics.
3) Even in the face of flooding rains, the USDA raised the Australian crop this week.
4) Wheat “has 9 lives” and the Plains drought could weaken next spring as La Niña begins to weaken.
5) Normally, trading northern Hemisphere wheat weather in the winter is not recommended.
CONCLUSION
Trading the grain market right now is difficult because of various factors, both weather-related and geopolitical. Not until December-February will South American weather play much more of a role in corn and soybean price action.
Nevertheless, the positive AAO/La Niña climatic correlation could set corn and soybean markets on fire in a month or so. However, in the short term, big-time rains will hit Argentina in the next few days.
For wheat, the weather will be a major factor between March and July.
We invite you to look at the different services we provide to farmers, novice and experienced commodity traders around the world, as well as our track record here:
Regarding trading right now: patience, patience, patience in the midst of global economic uncertainty, bearish chart patterns in some commodities, a stronger dollar, Russia’s war on Ukraine, and mixed weather signals.
The next big questions I will be answering for traders are:
1) Will the Plains states drought continue into next spring and impact winter wheat?
2) How serious will the flooding be that may lower the Australian wheat crop?
3) When will demand worries and a stronger dollar (which has been bearish for corn) be offset by the potential for bullish corn weather in Argentina?
4) How will a change in the jetstream pattern north of Alaska bring colder late autumn weather and put the brakes on the drop in natural gas prices?
Anyway, there are two commodity trades that have been our home runs recently. They were natural gas and coffee. (Some of this is old news now. We already caught the huge move down in prices).
So… what is the best way for you to profit, whether in stocks or commodities?
Listen to what Ted Williams once said (and my comments, below.)
1) Swing within your happy zone:
Basically, this means sticking with markets and products you know best.
In my case, and recent trading advice in my newsletters (see the info and our track record here https://www.bestweatherinc.com/weather-profits/ ):sticking to the highest confidence trades that I know are primarily weather, this time of the year, and were subject to significant profit-taking due to too many speculative (non-commercial) long positions in the open interest of the market. Most recently, these have been short natural gas and coffee over the past few weeks. These were definitely home runs.
2) I’m no genius, I’m smart in spots and I stay around those spots:
I want to lend you my insight from 38 years of experience watching markets and how they react to the weather at “certain times of the year.”
For example, my highest confidence trades in corn and soybeans are almost always during the late spring and summer and during the north American crop season. I also like to recommend grain markets during December-February when I know traders watch South American weather very closely.
Weather is a huge factor in the natural gas market as we go into the late autumn and winter.
For markets such as coffee, the weather is a critical time (now) during the early stages of the Brazil crop cycle: usually between October and December.
That is why, a month or so ago, I went against the bullish crowd in coffee. Take a look at the great early coffee bloom in Brazil due to the rain I forecasted for the Brazil spring, three months ago.
3) Be wary of over-hyped markets:
Some of the most successful investors like Warren Buffett and Ray Dalio are looking for opportunities that others are not.
In other words, catching certain industries early before the crowd and selling into panic and greed. Here too in the case of the soaring natural gas and coffee markets on past fundamentals, it was important for me to look into the future and anticipate a “change in the fundamentals” ahead of time. This is what I do best.
Some markets have already forced out all the longs and are heavily short… natural gas is a good example of this.
CONCLUSION:
Having patience right now in the midst of global economic uncertainty and various global weather fundamentals for grains, natural gas, and soft commodities is no easy task. There are some potential changes to the bearish weather in natural gas with colder late November weather, while the Argentina drought may grow for the corn market. Floods in Australia and the Plains drought are all potential bullish aspects for the wheat market, but it is important to develop longer-term trade ideas based on the third straight winter of La Niña. Feel free to download a complimentary issue of our monthly newsletter Climatelligence here https://www.bestweatherinc.com/climatelligence-newsletter/ and to read about some of our feelings.
If you like it and want to subscribe for a year, my December issue will discuss much more about the energy and grain market.
Jim Roemer’s Best Weather Spider gives experienced and novice commodity traders a heads-up of how weather, technical analysis, and other fundamentals affect markets in grains, natural gas, and soft commodities.
Here for example was his advice on July 5th before the major collapse in coffee prices. The spider includes weather sentiment (both short and long-term), technical analysis, and other fundamentals in order to make investing decisions.
While coffee prices may be oversold, it will take a frost in Brazil or renewed drought later this year to set the stage for a new longer-term bull market.
So what about the Texas drought that is affecting cattle and cotton? Will a flash drought move deeper into the corn belt and stop the bleeding in the grain market?
Please email us at scott@bestweatherinc.com to receive a free grain weather spider and information about our newsletters.
38 YEARS OF EXPERIENCE ANALYZING WEATHER AND COMMODITY MARKETS FOR FARMERS AND TRADERS
Big time rains we forecasted on July 10th for much of the central and eastern corn belt, plus a stronger dollar have put pressure on the grain market, as well as big wheat crops in Australia, Russia, and Canada
The map of Brazil below shows that low temperatures early last week were frosty. However, they occurred well south of Brazil’s coffee area.
It is rare to see a May freeze in the Brazilian coffee areas and it has never happened north of Sao Paulo. Years ago, there was a frost or two in May in Parana, but in the 1860’s-1980’s the coffee zone was much further south in Brazil.
This table shows the freezes in Brazil up until 2000. Since then, there has been one legitimate major frost scare and that was during La Nina last summer (their winter).
Coffee Prices Longer-Term and Weather Spikes and Bear Markets
Coffee prices sold off late last week. It was obvious these low temps were well south of the main coffee Brazil zone. The market rallied back a bit on Friday due to lower Brazilan crop estimates from some firms.
The one problem area I see is the wet weather that recently delayed the Colombia coffee harvest. This could continue to reduce global coffee supplies. However, without a major Brazilian frost scare and with the third year of La Nina, longer-term the market could be headed into a bear market. Ample October-December rainfall in N. Brazil meant a good early bloom. Unless droughts hit major production areas later this year, a global recovery in the 2023 crop could be bearish, later, longer-term.
Longter-term bear markets often occur after El Lino/La Nina spikes.
This chart above shows how the cycles work longer-term. After a major price spike (like what happened last year due to Brazilian droughts and frosts), a longer-term bear market and recovery in global coffee production usually results.
WEATHER WEALTH SAMPLE CONTENT
HELPING YOU MAKE THE BEST INVESTMENT DECISIONS BASED ON THE WEATHER
We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it.OkPrivacy policy
