December 14, 2020



December 14th, 2020



In This Issue:

Wheat Explodes: Factors causing the price rise, while Russian dryness remains

Natural Gas: Strong LNG exports, eastern US snowstorm this week, and AO index going negative exciting traders, but not convinced of major consistent winter cold

South American Weather: Some minor concern for Matto Grosso and southern Argentina crops, but most areas to see improved moisture.

Coffee Update: COVID-19 demand worries, more rains for Brazil are bearish, vs. weather problems in Central America and Vietnam (too wet)

US Snow Drought: Things may be changing

All about the AO Index: Special Report

Weather Wealth Trade Spread-Sheet

Wheat Explodes On China Demand, Lower Global Carry-Out & Russian Tariffs

At the global level, the 2020/21 wheat outlook includes an increase in supply. The forecast also comprises higher exports and consumption, and a reduction in stocks.

The department adjusted its estimates of global wheat supplies by +1.2 million tonnes to 1074.3 million tonnes. The adjustment followed the increase in global production, which is currently at a record 773.7 million tonnes.

USDA expects Russia, Canada, and Australia to record increased production in the 2020/21 crop season. In Australia, production is likely to rise by 1.5 million tonnes to reach 30 million tonnes. As for Russia and Canada, the agency predicts that the wheat output will increase by 500,000 tonnes and 0.2 million tonnes respectively.

On the other hand, the agency has adjusted exports by +10 million bushels. Shipments of white wheat have been on the rise. Conversely, those of the Hard Red Winter has been lower over the past weeks. Sales of the white wheat have largely been to countries in east Asia.  

China is the largest importer of agricultural commodities. Subsequently, investors looking to invest in commodities are banking on China’s continued purchase of agricultural goods. As indicated in the WASDE report, the forecasted rise in global wheat consumption is largely due to the heightened use in China, the European Union and Australia.

The agricultural department has estimated that China’s wheat consumption will be up by 3 million tonnes to reach 24 million tonnes.

Australia is heading for a very large wheat harvest (twice as large as the previous one, but otherwise a small yield), but exporters are nevertheless dropping out of the sale of soft wheat to China, which is especially suitable for the rapidly emerging (pastry)bakery sector there. Exporters think it is too risky, given the increased political tension between the 2 countries. This is difficult for Chinese customers because the desired type of wheat is scarce or too expensive elsewhere.

“Russia’s wheat crop is still in trouble, and I think the recent export tax tariffs that have boosted prices are “in part” due to Russian grain officials concerned about a crop, lower than what the USDA thinks. NEVERTHELESS, I think wheat prices may have gotten ahead of themselves. Global wheat supplies are still huge due to big crops in Australia, Canada, etc. and it is not all-weather right now. See my trade ideas at the bottom of this report. (Jim Roemer)”

Some snows are hitting the SW Plains, but not sure it will be a major factor for the wheat market, unless the spring is wet

The wheat ETF is up

The Wheat ETF (WEAT) has been on our spread-sheet since late September-early October and has now rallied about 10-15% since our recommendation. Resistance in wheat lies about 30 cents (5%) above the close on Friday. We also have a futures and options spread position that is up a bit. Weather is really not a factor right now. As of Sunday night, 12/13, wheat futures were a bit higher again but maybe a bit over-bought

Natural Gas Prices Watching Not Only US Weather (eastern US snowstorm) But Strong LNG Exports

Strong LNG exports were partially responsible for a bullish EIA number last week, even in the face of warm weather. The big short position in the market, upcoming eastern snowstorm later this week, and ideas of the AO index going negative helped to support prices late last week. Until then, I have been bearish natural gas since October but advised some caution last week (see my Wednesday night report, last week).

The AO and EPO Index

There is some talk by traders and other weather firms of the Arctic Oscillation Index going more negative and resulting in a much colder potential late December and January outlook, Please see the discussion at the bottom of my report about the AO index.

This fall the AO index has been positive and resulted in a record warm November and my bearish outlook in natural gas, since October. Many models are showing the opposite now heading into December (image to the right, that is colder and snowier)

The Eastern Pacific Index Is Key—Not Just the AO Index

The EPO index has to do with the weather over Alaska and NW Canada. When it is positive, this is a warm signal usually in the US. I will discuss more about this, later this week or next week. However, we also have the AO index going negative as represented by the red, warm block you see on this small image below over the Arctic.

Here are my analog years from my own computer software when the AO index is negative in January and the EPO positive. I will, again, discuss more about this later

January temperature outlook (more studies over the next week or so coming)

Looking at these analog years (above). The composite temperature map below is from La Niña years, combined with those that had a +EPO and a negative AO index.

BOTTOM LINE US ENERGY WEATHER: An eastern snowstorm and oversold situation have helped natural gas rally since my last report on Wednesday night. I mentioned last week that we closed out short positions with profits and I would not be surprised the market would rally. However, it is quite possible that any cold weather may be short-lived and I may think of an option strategy in natural gas in a few days. Strong LNG exports and winter not officially even starting yet is causing risk premium to be built into this market.

Notice the slightly colder 1-5 day and an eastern snowstorm this week and the 11-15 days a bit colder. The 6-10 looks really warm across the U.S. I will have an update about all of this, Wednesday night or Thursday a.m.

South American Weather Update–Improving weather for most of Brazil, some minor concerns for Argentina crops

The USDA trimmed its forecasts for global stocks of wheat, maize, and soybeans at the end of the 2020/21 season Thursday yet, the price reaction was mixed. I recommended for conservative traders to sell the March $12.40 soybean call on the price rally at 25 cents heading into the report. This is only the second soybean trade recommendation in at least 3-4 months! The other one was two weeks ago selling March beans just under $12 on my forecast for good Brazil rains, in which prices sold off some 40-50 cents in three days and we recommending booking profits for aggressive traders, only.

Anyway, Once the USDA report came out, soybean prices collapsed 20 cents. Why? The USDA did not lower Brazil production just yet and the market had rallied into the report, already expecting a bullish number, both from a global demand perspective, as well as ideas dry weather hurt the Brazil soybean crop.

Because of expanded acreage, I would venture to guess that is a main reason the Brazil soy estimate was not lowered. The corn crop however, was lowered in Brazil and the tight supply-demand situation for corn continues.

We are not 100% in a weather market in corn and beans, as strong global palm oil and corn demand continue to underpin prices. Nevertheless, as I mentioned a few weeks ago, I am not convinced that the weather going forward for at least the next couple weeks is of major determinant to the South American corn and bean crops.

Similar La Nina events, the AAO index and January temp and rainfall trends

January temperature trends may not be that hot in Argentina and S. Brazil

BOTTOM LINE SOUTH AMERICAN GRAINS: Matto Gross in northern Brazil is the main producer and could see some reduction in yields from dry weather, but 70-80% of the rest of Brazil and N. Argentina should get good rains heading deeper into December. You have firms like AgResources and others who keep touting up drought in South American; the same people who were bearish corn and soybeans following the worst wind storm in Iowa’s history and a mini flash drought last summer. Most of my research does not suggest any major production fall, except in isolated areas.

The blue trough you see over Argentina should bring decent rains into southern Brazil and N. Argentina later this week or early next week

Coffee: Some renewed global weather problems vs COVID-19 demand concerns

The harvest is now about 20 to 25% complete in Vietnam and the weather outlook looks wet which may delay the harvest. Also, I have been hearing more and more reports that the Brazil coffee crop was hurt by dry October and early November weather in the southern 35% of the growing areas. While rains have returned to Brazil coffee, occasionally causing a sell-off in prices, I feel that the hurricanes that hit Central America will lower global production heading into 2021.

Brazil’s main coffee areas have generally good weather for the early bloom in the key #1 region of Minas Gerais. However, you will notice that São Paulo and the NW part of Minas had drier than normal weather. It was also hot. Hence, there has been some compromise in the coffee crop in the southern and southwestern regions of Brazil. Crop estimates may come down in future reports.

It has dried out the last couple weeks in Central America but it may turn wet again for both Vietnam and Central America deeper into December. While not a disaster it may lower crop quality a bit in the weeks to come

BOTTOM LINE COFFEE: Rainfall in both Vietnam and Central America will return to above normal. I do not think the Central American weather is anything really new but the Robusta harvest in Vietnam may be stalled again. Rainfall will increase in Brazil coffee, deeper in December, otherwise, I would be much more bullish. I am not sure from one day to the next what traders will look at and the reason we have a conservative, profitable short March put position on our spread-sheet.

Brazil coffee areas look wetter again (green) in the north by the 11-15 day, otherwise, I would be much more bullish this market.

US Snow Drought. Will That Be Changing?

A series of storms over the next two weeks will ease the snow drought in some areas. I will have an update in a week or so about historical La Niña events and winter snowfall. A major eastern snowstorm this week is exciting natural gas traders as some feel the AO index will remain negative into January.

A) snowfall hit the far SW Plains SUNDAY with up to 3-6″ in some key wheat regions

B) Nor’easter this week with AO index going negative with up to a foot+ of snow in some areas. This may get a bit of notice in the natural gas market. There may also be an eastern snowstorm around Christmas.

C) Prior to Christmas, much of the Canadian Prairies will get sucked with a few feet

We really need to see more snow cover in order to see more sustained cold for the natural gas and heating oil markets. I will discuss more about this and the longer-range outlook, next week.

How The Positive AO Index Is Related To A Melting Arctic

This is just an interesting piece as to why the AO index has been positive this fall and the record warm weather across much of the country. The AO index will go negative for a week or two, but I do not believe it is a long-lasting feature and hence, no more than an occasional brief cold snap for US energy areas. Nevertheless, natural gas traders have rallied prices some 20-30 cents since last Wednesday on this and stronger LNG exports.

The Melting Arctic and Arctic Oscillation Relationship:

The Arctic is warming more than twice as quickly than the global surface average. This phenomenon is known as “Arctic amplification”. In part, this stems from the rapid loss of sea ice cover in the region. As Arctic sea ice diminishes, energy from the sun that would have been reflected away by the bright white ice is instead absorbed by the ocean, causing further warming (declining snow cover over Arctic land areas has the same effect.)

The idea of a link between Arctic conditions and mid-latitude weather goes back a long way. Prof James Screen, an associate professor in climate science at the University of Exeter, says some of the earliest research on the topic was published by Swedish meteorologist Professor Hugo Hildebrand Hildebrandsson in 1914 and Russian oceanographer Wladimir Juljetitsch Wiese in 1924

The earliest modeling study to investigate the links between sea ice and winter weather in the US and Europe could be a 1978 paper in the Monthly weather review by a pair of Nasa Scientists. The study used an early climate model to show that sea ice changes are “capable of altering local climates in certain regions of the high and mid-latitudes”.

In 2005, Dr. Judah Cohen, director of seasonal forecasting at Atmospheric and Environmental Research (AER) authored a paper that proposed a direct connection between climate change, declining Arctic sea ice, and different phases of the Arctic Oscillation.

The warming Arctic last fall caused stronger winds at the North Pole, which has kept the polar vortex well to the north.

Pay attention to what happens with La Niña and the AO index in the months ahead. This will have a huge effect on everything from grains to natural gas and soft commodities such as coffee and sugarThere are some signs that the AO index (Arctic Oscillation Index) will begin to turn more negative deeper into December and January. However, once again because of melting sea ice the odds of consistent major cold weather is probably not in the cards.

Weather Wealth



Traders are long July KC wheat with profits again but short the March $6.05 CBOT call option from 20 cents. This trade is ahead. Also, short the March $12.40 soybean call from last week’s rally prior to the USDA report. This is a sophisticated trade position.

We also have the long wheat ETF (WEAT) on our spread-sheet for 2 months that is ahead now, at least 10% While I am potentially bullish wheat longer term, I am going to lift this ETF position for now and wait to see how late winter and spring weather fares and look for a place to possibly re-enter the market. Since wheat has rallied on China’s demand issues and Russia’s Export Tax tariffs, we will wait till it’s more weather-related again. However, I still feel that global wheat prospects could come down this spring from weather problems and the Russian wheat crop coming down.

Soft Commodities:

See the spreadsheet for our coffee ETF position longer-term and recommendation a couple of weeks ago to sell March $1.10 coffee puts and to buy January Robusta coffee last week

Also, have a short March call option position in cocoa from two weeks ago on big global crops and good weather for cocoa.

Natural Gas:

My report last Wednesday night expressed a “less bearish” attitude, and indeed prices rose some 20 cents+, after this. The problem is, that while there is some occasional colder weather, the AO index may NOT be consistently negative and something very important to natural gas trading (Eastern Pacific Oscillation index) is NOT in a favorable phase for extreme sustained cold. If it was, I would have been much more aggressive recommending a buy last week. I expressed that I wanted to take a conservative long position by selling March put options on the lows in the market, last Wednesday night, but because of the premium, not being juicy enough and just occasional brief cold snaps, I did not do this. ( I will re-evaluate all of this later this week, but do not want to make any mistakes until I see trends of the AO and AO index.

My in house computer software does not expect long-lasting cold. I will show some other examples, over the next week or so and this winter.

Renewable Energy Stocks:

See the spreadsheet


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