Most commodities continue to be in bear markets with the exception of cotton, crude oil and gold, and maybe a couple of others. This is because of generally big global crops and stockpiles (corn, wheat, coffee, etc.). It is also because of demand concerns, with respect to a resurgence in Covid19. There was too much “noise” to have given any “bullish, strong buy signals right now” in many of these markets the last few months. However, I feel that corn prices may see some short-covering soon because of the potential for some heat and dryness from Kansas to Nebraska and maybe Iowa in about 10 days or so and the Texas drought worsening may support cotton. Also, big Plains heat could begin to support natural gas prices a bit.
I mentioned that longer-term there may be a play from the long side of the natural gas market. Traders hopefully read between the lines. In the short term, the technical picture of the market and the weather is “not bullish natural gas.” Nevertheless, it is possible that 100-degree heat in the Plains may keep this market from falling a lot further.
For those of you who look forward to reading my trade ideas, I don’t want to spit out low to moderate confidence recommendations without a “weather type high confidence play”. COVID-19 continues to play havoc in many markets. I mentioned for weeks that being bearish corn and wheat were my top plays, but I am looking to advise taking profits now on short corn and waiting.
Over the next few weeks, I want to continue to look at various types of La Ninas. I will also assess how a potentially warm July in the Midwest may impact corn yields. Also, I’ll look more closely at cotton’s weather, the dryness in west Texas, and potential pest issues in Pakistan and India later in the summer.
In This Report
Today’s report sheds more light on how the present situation is not typical of a full-fledged La Nina for most crops. It is possible that warm night-time temperatures coming up for the corn belt in July, will NOT be as optimal for yields as cooler than normal weather would be. Corn prices would definitely hit $3.00 if July was cooler than normal. However, 90-100 degree heat after July 4th, in the far western corn belt could possibly result in a buying opportunity, following my bearish attitude for months in corn. Yes the corn crop looks outstanding and Monday’s weekly crop progress report should show improved conditions, but I do not see a lot of additional downside in corn and possibly natural gas, for the moment.
- La Nina and global crop impacts
- SOI index–an important teleconnection for La Nina
- European model trends toward warmer, drier conditions for Midwest grains in July
- Warmer low temperatures at nighttime for the midwest
- AAO index implications for coffee
- Best Weather spider–Weather may be less bearish corn, natural gas, and friendly cotton (bottom of page)
La Nina And Global Crop Impacts
First of all, please note that the illustration above was from some 10 ago. This was before soybean and corn production, for example, expanded throughout Argentina and Brazil. Look at the arrow over Argentina for soybeans and maize (corn). This would infer that less than 2% of the global soybeans supply (red=negatively impacted) and 11% of global maize (corn production) is adversely affected by La Nina. In reality, it is quite a bit higher than this. When one combines the Midwest corn and soybean belt and Argentina, roughly 35% of the world’s corn and bean supplies can be adversely affected by La Nina.
This is really important. If La Nina can strengthen, with the SOI index turning more positive and ocean temperatures cooling more in the Pacific, then the potential for some hotter more bullish July or August weather would develop. This would be not only for the Midwest grain belt but also for Argentina next year. The multi-year bear market in grains would alter.
Strong El Ninos tend to bring droughts to Southeast Asian palm oil, rice, and coffee crops, as well as Brazil soybeans, sugar, and/or coffee. But for the sake of this discussion, we are only focusing on La Nina.
It should be noted that global cotton production can also be affected by both La Nina and El Nino.
SOI Index: An Important Teleconnection For La Nina or El Nino Conditions
In simple terms, the Southern Oscillation Index has to do with the Trade Winds near the Equator. Here is an image of the interactions when La Nina conditions were present. In years such as 2011, 1988, and in some of the dust bowl years of the mid-1930s and mid-1950s, the Trade Winds blow from east to west, cooling off the oceans (La Nina).
When the index has a positive value, we call this a positive SOI index and La Nina type conditions. These Trade Wind changes tend to cool in the western Pacific eventually and alter weather patterns around the world. However, notice how the index (below) has been mostly negative. This is one reason why the Midwest received some decent rains recently, breaking the corn market last week.
In other words, at times, the atmosphere is NOT acting like a full-fledged, Midwest drought type of La Nina yet. This is because the SOI index has not always been positive. But will this change and potentially bring some hot summer weather for the grain and natural gas market? (stay tuned for future reports)
European Model Has A Trend Toward Warmer, Drier Conditions After This Week’s Rains
If this model is correct, it would take the bearishness out of corn and soybeans (COVID19 and China export worries aside). I don’t like believing models like this per se, but depending on teleconnections it is possible this scenario could develop in a couple weeks
Warm Night-Time Low Temperatures For the Midwest Grain Belt
For corn to reach its maximum yield potential in the Midwest, the preferred July weather scenario for pollination is nighttime low temperatures in the 55-63 degrees range, low humidity, and day-time high temperatures not exceeding 90 degrees. Very warm night-time low temperatures could jeopardize the “full yield” potential of some corn. But will that really be a bullish factor in the midst of good crops right now, huge global stocks and Ethanol demand concerns? Stay tuned.
Nevertheless, it’s hard to become very bullish on corn unless there is a widespread swatch of dry weather. However, cooler weather is not in the cards right now. If it was, an even bigger global supply situation would arise in the next few months. Improved rains in Europe, concerns about COVID-19, the ethanol situation, and off and on chances for Midwest rains were not bullish signals for the corn market. If the European model discussed above were to verify, then yes, some reduction in yields for corn and beans would be in the offing. The greatest chance for some dry early to mid-July weather will be over the western and southwestern 30% of the grain belt.
AAO Index Tanking Over Antarctica: Any Implications for Brazil Coffee?
The AAO index has to do with a polar vortex (you have all heard about that) over Antarctica. (This is not the vortex over the North Pole that can sometimes come south in winter and affect the energy market.) This week the AAO will come north from the South Pole. When this happens, it can result in wet weather for Brazil coffee and sugar areas. The weather is probably net bearish for sugar. However, it could cause some short covering in the coffee market over this next week or so. Nevertheless, I do not have high confidence in this market.
Best Weather Spider
Don’t show this to your kids (ha)!
My Best Weather spider gives general market sentiment with respect to how much weather is in the market. The commodities where the spider is crawling too are those markets that may become potentially more bullish.
Given COVID-19 and China once again extremely “tee-eed” off at the Trump administration and threatening fewer purchases of US grains, this only added to the recent spiral down in corn and wheat prices. However, with warm night-time low temps in the corn belt and the whole summer ahead of us, I raised my extremely bearish (-4) corn sentiment from the last month to more neutral right now. We already had a great break in most grain markets and we still have the whole summer ahead of us. I want to book profits on the spread-sheet on the short corn position, for now.
For Soybeans, there are too many factors with respect to China’s demand (or not) and given market action and some potential hot August weather, my confidence is low right now being short this market with long PUT options, even though it is a low-risk longer-term trade. I want to see cool not hot weather in the forecast for July. Obviously, US crop conditions are ideal and but I would rather just exist the position and wait till I have more confidence.
Great crop prospects in Australia, the dryness easing as I predicted in Europe and Russia a month ago, and US harvest pressure caused wheat to fall to new lows on Friday. I have been bearish wheat for weeks (read my past reports) but did not actually pull the trigger again recommending a strong sell.
Sugar and cocoa I am not really watching too much. However, I think global cocoa production could increase in 2020-21 and is generally not bullish.
Natural gas may NOT see an explosive move higher anytime soon. Again, I have moderate confidence right now being conservatively long, hoping the blood-bath may end being short October natural gas puts for the next few months. As I pointed out many times, demand and COVID 19 are not yet bullish with such huge, huge supplies. Just buying a market (natural gas) because it is cheap is not a smart strategy. There need to be some strong fundamentals behind it. But, 90-100 degree heat coming to the Plains could prevent this market from falling much further, so I think selling or staying with October put options in natural gas is a smart play.
For coffee, I suggested last Thursday for aggressive traders only to buy a break. If you want to risk last week’s lows that is fine. The maps here showing some wet weather and minor harvest delays for the Brazil coffee crop may be one reason why there was a bit of short covering in coffee on Friday. The market acted well Friday in the face of the Brazil Real collapsing again. This is because of the upcoming wet weather for Brazil coffee. But I do not think it is a major market factor. Robusta coffee I just do not have a lot of confidence in at this point.
Cotton weather may be bullish due to the drought in Texas expanding. I will address more of this in the weeks ahead. Here, too, it is the China demand situation and COVID-19 that makes trading this and many markets quite tricky. Will the major locust plague in Africa affect Indian and Pakistan cotton production? if so, this market could explode later this summer or fall.
My highest confidence trade recently was short corn into the early summer. Again, looking to take profits on short corn and there may even be a buying opportunity on this huge sell-off in corn and beans, depending on the ridge after July 4th. I will look more closely at my report by Thursday a.m. I have a sneaky feeling that within a few days or so, natural gas prices may bottom due to some Plains and Midwest heat and I will be thinking about a possible friendly strategy in cotton. Again, COVID-19 and the demand situation is still affecting many markets. The spider shows the sentiment from the weather influence, only.
With Jim Roemer
2 week free trial
• Weekly global commodity weather and crop outlooks
• Weather Trade of the month recommendation for either coffee, corn, soybeans, natural gas or one other market
• Detailed information on how global weather may affect commodity prices
• Email Jim Roemer (one question a month) about your market position
• Encompassed crop analysis and special weather maps from around the world
• CLIMATE PREDICT long-range weather forecasts used by major hedge funds and commodity traders
• Grain, Soft and Energy Commodities—Know before the crowd where the weather extremes will be