The Antarctic Oscillation Index (AAO),  South American Grain Production, and Why Wheat Prices Can’t Rally

The Antarctic Oscillation Index (AAO),  South American Grain Production, and Why Wheat Prices Can’t Rally

Will a Warm Winter Materialize?

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.

COld vortex 5-10 miles above Antartic

Source: NASA.

Cold Vortex ++++AAO over Antartic

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%.

La Nina over south American waters and antartic oscillation are a volatile mix

Source: Stormvista.com

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).

The positive AAO index coupled with La Nina favors Brazil coffee

Source: Jim Roemer, ClimatePredict.com

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:

Climatepredict teleconnections

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:

Global Wheat Weather Problems

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:

https://www.bestweatherinc.com/weather-profits

The EPO Weather Index and Why Natural Gas Soared, Then Collapsed

The EPO Weather Index and Why Natural Gas Soared, Then Collapsed

Weather Natural gas

Click here to play the video above.

What Gives With Natural Gas?

The historic volatility in natural gas continues. Last Friday, I told WeatherWealth clients about a major change in the weather pattern with a potential colder than normal late November and December. Natural gas prices proceeded to rally $1.00 from last Thursday’s lows and bearish EIA number to this Monday’s highs ($7.22) based on other firms changing their weather forecast.

This video describes both La Nina and what we call a “negative Eastern Pacific Oscillation Index. The combination of these two climatic variables working together can produce a cold, early winter. Why then did natural gas prices pretty much give everything back in one day? Incredible.

Four Reasons for Natural Gas Moves

Here are the reasons I felt that natural gas (UNG) prices ran up too much, too quickly in the face of changing weather forecasts. After all, we had a near-record warm fall (globally) that has hurt natural gas demand. In addition, the main LNG export terminal in Freeport, Texas has been down for months.


1)Natural gas prices above $5-$6 this time of the year is very unusual as U.S. production continues to grow.

2) While the LNG export terminal will reopen soon, the weather forecast is warm for Europe. Hence, we need to see sustained cold weather, not just here in the U.S. but in Europe to help demand.

3) The weather last week was very warm across the United States and near-record temperatures this week. While potential colder late November and December weather could well occur, the natural gas market was anticipating another bearish EIA report this Thursday.

4) The European forecast models suggest that after just a week or so of U.S. cold, it will warm up again.

European Weather Model

The European Model warms things up after Dec. 6 (red=warmer than normal). Source: Stormvista.com

Conclusion

So what to do in the natural gas market currently?

Based on extraordinary natural gas and weather volatility, using certain option positions is the way to go in this market. This is something we advised quite successfully in several commodity markets over the last few months.

Feel free to take a complimentary trial of our twice-weekly weather-commodity newsletter (Weather Wealth) and see this and many other reports. You can also learn how you can mimic our trade ideas in a new program called AutoTrade. All the information is here:

https://www.bestweatherinc.com/weather-profits/

Here are the headlines from one of our recent Weather Wealth reports.

Weather Wealth

REMEMBER, THERE IS A RISK IN COMMODITY TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Lessons For Successful Commodity Trading: Weather And Patience 

Lessons For Successful Commodity Trading: Weather And Patience 

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:

Baseball weather trading

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:

trading dog genius weather

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.

coffee trading weather

3) Be wary of over-hyped markets:

cat coffee trading weather

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.

Why The Indian Monsoon Is Too Much Of A Good Thing For Some Commodities

Why The Indian Monsoon Is Too Much Of A Good Thing For Some Commodities

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  • India’s agriculture sector accounts for around 14% of the country’s $2.7 trillion economy and 42% of total employment.
  • With around 55% of India’s arable land dependent on precipitation, the amount of rainfall during the current monsoon season could sway economic activity in the agriculture sector and industries linked to it.
  • The current flooding in parts of central and northern India has damaged the cotton crop and dry weather is needed for the harvest season for sugar cane and rice as well. Flooding may prompt the Indian government to raise minimum support prices for all of the current season’s crops to help support farmers’ incomes.

Given the terrible drought this summer to Texas cotton and now incessant October rains hitting 30-40% of the Indian cotton crop, we can see why cotton prices in particular rallied off of key support areas late last week and on Monday.

What will happen next and will flooding the rice and sugar cane market? We invite you to a 2 week FREE trial to Weather Wealth here  https://www.bestweatherinc.com/membership-sign-up/

Europe: Heat Records Obliterated, Wheat and Corn Smacked

Europe: Heat Records Obliterated, Wheat and Corn Smacked

When the UK’s Met Office made a long-range forecast for British and European weather in 2020, no one foresaw that its extreme 2050 heat forecast would arrive in 2022. Tuesday, the UK recorded its highest temperature ever, 40.2 degrees Centigrade (104.4 F).

Across Europe, temperature records have been broken all week. Over 2,000 people have died in Portugal and Spain alone because of heat and wildfires rage from Turkey to Spain and north to the Arctic Circle. Agriculture is suffering, with corn yields predicted to go down by 30% in Italy and 16% in Spain.

The complete social and economic damage has yet to be calculated for this summer’s wild weather in the Northern Hemisphere but the European Environment Agency estimates that the continent has lost up to $552 billion in the last forty years from extreme weather events.

At a climate summit in Berlin this week, António Guterres, the United Nations Secretary-General, declared, “We have a choice. Collective action or collective suicide.”

WIth European temperatures reaching up to 115 Fahrenheit and London thirty Fahrenheit degrees higher than average, is it any wonder the UN Secretary-General despairs?

Temperature changes in Europe show the increased heat
Temperature change in Europe since 1900. Source: UNFCC.

First Cold, Now Heat: Euro Agriculture Has Taken A Big Weather Hit This Year

This is Europe’s second heatwave this year and forecasts call for more. Heat has not been the only concern for European agriculture this year, however. A record-setting cold snap in April came after higher than normal spring temperatures. Late frosts impacted almond and fruit trees in Spain and wine-growing regions in France. Impacts on grain-producing regions in Germany and other countries were small. however.

The current heat wave has led to early harvest in some soft wheat-producing areas. France’s Ministry of Agriculture forecast that 2022 soft wheat production would decline by 7.2% thanks to drought and heat. France is the largest wheat exporter in the European Union and the world’s fourth-largest.

Heat Defeats Italian Farmers, Already in a World of Climate Hurt

Italy, too, has seen a decline in its soft wheat harvest this year. The Italian Association of Millers forecast this week that the soft wheat harvest would come in at 15% under 2021’s number. Durum wheat production, according to the Italian millers, could fall by 10%.

Minster of Agriculture Stefano Patuanelli announced last week that as much as 30% of Italian agriculture will be lost this year due to drought and heat. The government declared a heat and drought emergency in five provinces and Italy’s main farm lobby, Coldiretti, estimates that Italian farmers have lost up to US$3 billion.

The Po Valley Drought Is the Worst in 70 Years

In the Po Valley, the heartland of Italy’s rice growing area, heat and drought have decimated crops. The Po Valley includes the provinces of Lombardy, Emilia-Romagna, Friuli Venezia Giulia, and Piedmonte, some of the most productive land in the country. A farmer there estimated that up to 70% of their crops were already gone. Saline water from the sea normally reaches three miles up the Po. This year, it has intruded up to 18 miles inland, damaging crops irrigated with river water.

Po River drought in heat wave.
The Po River is seeing the worst drought in 70 years thanks to reduced winter-spring precipitation and summer heat waves. Source: SciTechDaily. Contains modified Copernicus Sentinel data (2020-22), processed by ESA, CC BY-SA 3.0 IGO.

Over 50% of Europe and UK on Drought Alert or Warnings

Yesterday, the European Commission published its report “Drought in Europe July 2022“, which found that an unprecedented 44% of land in Europe and the UK is at a drought warning stage, with 9% at the alert level. Winter-spring precipitation deficit was up to 22% more than in 2021 and this is stressing vegetation, especially in the south of the continent. Water Europe estimates that 59% of freshwater use in Europe is for agriculture, with a significant amount used to keep agriculture going in parched Southern Europe.

Water Europe also reports that annual renewable freshwater resources per inhabitant decreased across much of Europe during 1990-2017. The greatest decreases were seen in Spain (-65 %), the greenhouse for Europe, and Malta (-54 %).

In Italy, Minister Patuanelli said that the latest government research showed that Italy had lost 19% of its available water resources from 1991-2020 compared to 1921-1950. He added that the coming decades could see further decreases of up to 40%. Coldretti said that northern Italy has seen half the average rainfall for the last few years. To combat this year’s drought, water rationing has been instituted in cities across Italy.

Too Much of Europe is Burning

This summer’s heat waves have lead to record numbers of fires in forest and agriculture areas. The state of Brandenburg in Germany already has experienced over 260 wildfires this year. Forests in Southwest Europe have been hit unusually hard. Across Spain, over 70,000 hectares (173,000 acres) have burned, around twice the average area in a year. Meanwhile, a record number of hectares have burned in France for this time of year; the fire season has not hit its traditional height.

Hectares burned in France in 2022 in heat wave compared to other years
Hectares burned in France in 2022 heat waves compared to previous years. Source: Dr. Serge Zaka, Asso Infoclimat.

What Might Be Causing Europe’s Disasterous Heat and Drought?

A recent study in Nature posited that Western Europe has been a heat wave hotspot for four decades, with heat events increasing in both frequency and intensity. The study found that there was an increased frequency of and intensity when the phenomenon of the upper atmosphere’s jet stream splitting into two occurred. Heat waves would then develop between the two flanks of the jet stream, leading to the rise in European temperatures. What caused this divide was not clear to researchers.

For most of Europe, the extreme weather impacts from climate change are already easily seen, no matter what the cause. “The moment of real climate crisis is 2022,” Rudolfo Laurenti, Deputy Director of the Bonifaca Po Delta Authority, told CNN.