GAZING INTO THE FUTURE. ARE COMMODITIES STILL A GOOD LONGER TERM INVESTMENT?
March 21st, 2021
In this report:
See my YouTube video about global commodities
Why I have been bearish wheat? The trade of the month?
Quick update for Australia, South American and Midwest grain weather
The stronger dollar and a look at the overall commodity index
Warm late winter pressures natural gas with April likely warmer than normal
Cocoa weather has turned mostly bearish again
A look at the May-December corn spread
Where are U.S. drought areas?
Nano Bionic: New amazing technology for plants
Brazil coffee crop looking worse, but a strong dollar and weak demand keep prices volatile, for now
WEATHER WEALTH SPREAD-SHEET (PLEASE CLICK ON IT TO SEE OUR RECENT COMMODITY TRADES, ETFS AND RENEWABLE ENERGY STOCKS
Please click on this video above to hear all about commodities and what’s ahead. The blue spiral you see was my forecast from 2-3 weeks ago. It helped to break the wheat market some 30-40 cents (5-8%). Also, I mention many more commodities here and referred to coffee and summer weather being important. (But that is winter of course, in Brazil)
MY WEATHER TRADE OF THE MONTH WAS SHORT WHEAT. HERE’S WHY
Important rains the last 10 days in key US wheat and corn growing areas, increased European and Russian wheat crop estimates from improved weather, resulted in a massive sell-off in wheat futures. However, I will be watching very closely the northern Plains drought and parts of Canada that may have a bullish impact on spring wheat (traded on the Minneapolis exchange) if we find in a month or so that dry weather and planting delays continue.
Please see the spreadsheet at the bottom of the page for my advice in wheat and some other markets.
Rains have improved wheat prospects easing the drought from Nebraska to northern Texas and a major reason for the massive sell-off in wheat in the last couple of weeks.
Quick weather update for US, Australian, and South American grains
Big time rains and flooding will hit much of central and eastern Australia ahead of the planting season, ensuring good early fall soil moisture.
PLAINS WHEAT AND MIDWEST CORN BELT:
It’s a long growing season, of course, for Midwest corn and soybean farmers and planting does not start for another month or so. It is early, and there could still be some summer weather problems, possibly. However, for the nation’s wheat crop, this is a critical time of the year through May. Drought easing rains for many key wheat areas have been a reason for my recent bearish attitude.
South American Corn and Soybeans:
Rainfall the last week has improved in Argentina (map to the left shows above-normal rainfall) but the damage has already been done to corn and soybeans. The map to the right shows rainfall the last month in which some key soybean areas in Rio Grande Do Sul, etc. may have suffered more crop losses. Wet weather in northern Brazil delayed the soybean harvest, which is the slowest in about 10 years. In addition, it has been delaying the safrinha corn crop planting.
The forecast is for improved weather for South American soybeans with some important rains in southern areas and a bit drier in the north, which will allow the harvest to resume. The question for the market for old crop May and July soybeans brings up many factors. One is China’s demand, or lack, thereof. Also, there are influences from outside markets. Another matter is how quickly the export channels in soybeans open up. All of these could put pressure on old crop soybeans again, at some point.
Stronger U.S. dollar signaling inflation? mixed signals and confusion
Crude oil, sugar, coffee, gold, and some other commodities have been under pressure again as the dollar strengthens. The U.S. economy prospects have been better than most other countries. This has helped the dollar rally 2-3% in the last few weeks.
However, more government spending and the Federal Reserve buying a huge amount of U.S. debt (the most since post World War II) could eventually be bearish for the dollar, again. This is because of the potential for rising inflation. All of the foregoing is speculation and “not written in stone”. If the dollar weakens, it would, of course, be bullish for some commodities.
Nevertheless, the majority of market participants consider the Fed’s cautious approach to interest rate hikes to be justified and assumes that this supports the economic recovery. That improves the longer-term economic outlook and, therefore, justifies higher interest rates long-term as well as a stronger dollar.
BOTTOM LINE: Many commodities from silver to gold, copper, crude oil, etc. will be subject to Fed policy, interest rate rises (or not), and the dollar. However, the weather will become a key factor again for many agricultural markets in the months ahead. I still like a diversified basket of commodity ETFs longer-term and I will discuss this more in the next week or two.
The recent commodity boom. Is it over?
After 10 years of underperformance, commodities began booming later in 2020. Crude oil soared more than 100%, grains some 30% on global weather concerns and strong Chinese demand. Silver and copper have been rising, in part, due to the expansion of electric cars, new technologies and the green economy.
Companies like Goldman Sachs have been touting “the beginning of a much longer-term structural bull market that could rival the 1970s when gold rose 25-fold.”
Students of previous commodity bull markets are aware that the first mover in a synchronized rotational commodity upswing is usually gold. The yellow metal is the first to react to excess monetary creation.
Last year, gold hit an all-time high as measured in all major currencies – not just the U.S. dollar. Since the U.S. came off the gold standard under President Nixon in 1971, the dollar has lost 98% of its value versus gold.
Despite recent weakness, gold remains in a primary bull market, but gold is not the only commodity to offer a hedge against currency debasement – copper, silver, nickel, wheat and coffee are all eventually just as inflation-proof as gold. It is just that all these commodities do not go up at the same time and tend to trade in rotation.
COMMODITY PRICES THE LAST 10 YEARS
Over the last ten years, commodity prices are only up about 10% versus the stellar 80-100% rise in the S&P 500. But, look at how commodity prices broke above the bearish trendline a few months ago. The move was largely due to weather problems on all continents, China’s demand, and the expectation for post-Covid global economic growth.
COMMODITY PRICES THE LAST YEAR
Crude oil, copper, silver, grains and cotton (just to name a few commodities) have been the real winners over the last year. However, worries over a third wave of Covid in Asia and Europe and a stronger dollar just caused crude oil to sell off 10%
COMMODITY PRICES IN MARCH FALL OFF A BIT
Though not weather, of course, I warned about being too bullish gold at $1900. Rising short-term interest rates and a more stable U.S. economy caused a 15% slide in gold. Wheat prices took the biggest hit as global weather has improved.
CONCLUSION: The potential still exists for some summer weather problems for grains and other agricultural commodities, even though La Niña is weakening. If the dollar continues to rally this would put pressure back on precious metals and other markets. However, Chinese demand for commodities continues to grow and I will be watching their weather closely this summer. The combination of a positive technical chart picture in the commodity index, interest rates still at historically low levels, and a greener global economy should continue to help commodities in the longer-term.
Warm late winter and spring pressure natural gas due to the positive AO index
Well, I chickened out on my spread-sheet a few weeks ago and only took all profits on short natural gas after being bullish UNG and natural gas during the first half of February.
If you remember, I was calling the historically cold February outbreak the Arctic pig, but then mentioned we would have a “goat”; bear market in natural gas due to my forecast of a warmer later winter. This has indeed happened as the Polar Vortex retreated back to the Arctic (see below for the next couple of weeks).
Following 4 winning natural gas trades in a row (mostly in conservative options) over the last 9 months, I am considering some kind of conservative longer-term long position in natural gas. This is the shoulder month when natural gas demand is very weak and it will stay that way. STAY TUNED this summer and fall for my hurricane forecasts, etc.
Soil moisture maps and recent % of normal rainfall Europe and US
WEATHER IMPROVING FOR GLOBAL COCOA pressures prices again
Concern that a spread of a third Covid wave through Europe will lead to longer lockdowns and tighter travel restrictions. Those measures will reduce economic growth and commodity demand. A very clear “case in point” is cocoa. Lockdowns undercut cocoa prices. In addition, rains in West Africa (which produces 70% of the world’s cocoa) have increased again.
May-Dec corn spread widening as Midwest soil moisture improves vs stellar China Demand
The first half of March for Mato Grosso was the wettest in more than 30 years, slowing soybean harvest, and delaying safrinha corn planting. As planting continues to be delayed, the threat of planting safrinha crop outside the ideal planting window is becoming a real possibility. Later-planted crops will likely reach the sensitive reproduction phase just as Brazil enters the dry season, which can cause yield losses.
The corn market already faces the need for a high yield in the U.S. crop this coming season due to relatively tight ending stocks for 2020/21, and continued strong exports could tighten stocks further.
As of early last week, Brazil soybean farmers have seen the slowest harvest in more than a decade.
The alarmingly slow pace of this year’s soybean harvest is a massive headache for the safrinha corn prospects, with planting delays the worst since the 2010-11 season. The crop represents around 80% of the country’s total corn output, a significant proportion of which is exported. It is sown into the soybean stubble immediately after the harvest, with both operations quite often happening on the same day.
According to Safras & Mercado, domestic corn consumption will hit a record 77.4 metric tons this season. Corn supplies are already tight, raising the possibility that the country will need to import from Paraguay and Argentina in the coming months to quell domestic prices and bridge the supply gap to the late safrinha crop harvest.
The flow of soybeans from Brazil to China is improving rapidly, and Argentina continues to offer corn into the export market, putting a cap on global values. Other than the weather, the next significant row-crop signpost will be the U.S. March Prospective Plantings report from the USDA, due for release at the end of the month.
Where are u.s. drought areas contracting and expanding?
It’s a long growing season, so STAY TUNED. If the northern high plains do not receive timely rains by mid-late April and head of planting this will begin to be noticed by the spring wheat Minneapolis contract. But it is still early. Once we get into April-August, look for many trading opportunities in grains.
Spring wheat is a different animal than soft-red wheat (grown in Illinois, Missouri, Indiana, Ohio and Europe) and hard-red wheat (high-quality wheat used in bread, grown from Nebraska, Colorado, Kansas, Oklahoma, Texas, and Russia).
Stay tuned over the next few months. There may still be some spring or summer weather problems for grains and other commodities. I will discuss more, in the coming weeks, about these analog years below. They were La Niña Modoki years that also had a warm March and April with a positive AO/NAO index.
Pioneering so-called plant nano bionics
Here is just a “tidbit” of information for all of you farmers out there and anyone interested in agriculture. I thought you might find this fascinating.
An MIT research team has found ways to use tiny sensors to hack into the signals plants send and alter the way they act.
Glowing trees that can replace street lights and spinach that can send out emails to warn of approaching danger sounds like the stuff of fantasy.
But, a laboratory at the Massachusetts Institute of Technology, which is pioneering what its lead scientist Prof. Michael Strano has named plant nano bionics, is bringing these things closer to reality.
Scientists have known for some time that plants communicate with one another and with the outside world, but Strano’s research opens the door for humans to hack into the signals a plant sends itself, getting the plant to report what is happening — via email.
Strano’s team managed to develop and embed minuscule sensors into the water-carrying vascular tissue of spinach leaves to pick up information about materials sucked up by the roots and sent to the leaves.
COFFEE: WHY CAN’T PRICES SUSTAIN A RALLY WHEN THE BRAZIL CROP LOOKS LIKE THIS?
The picture on the right is some coffee fields in northern Brazil this year versus the lush, healthy crop last year, on the left. Come harvest, coffee prices have a chance to rally as the global situation tightens, but in the short term, it has been much too difficult to trade. The stronger dollar and large present supplies continue to create market volatility,
What is my forecast for a possible winter Brazil freeze, or not? Stay tuned for the next few months for my updates.
WEATHER WEALTH AND TRADE IDEAS
We are sort of in a shoulder month now, in which weather in many markets is less of a factor until we get into the spring and summer.
CLICK ABOVE ON WEATHER WEALTH TO SEE SPREADSHEET TRADES AND PERFORMANCE
Global wheat crops are coming out of dormancy, and improving weather has been bearish for several countries. While I am still cautiously bearish wheat the spread-sheet will be booking at least a 25-30 cent profit on short K.C. wheat. It is still a long growing season and things could turn drier again later for some wheat-growing areas. We had the break-in prices I was looking for. Nevertheless, if conditions continue to improve wheat prices may have another 25-50 cents downside the next 2-3 months.
Natural gas weather is bearish, but unfortunately, after catching the top in this market close to $3.00 and the major February cold wave, I have had no new advice at this point and prices are too cheap to recommend selling down here.
RENEWABLE ENERGY STOCKS AND COMMODITY ETFS
I made some recommendations on the spreadsheet again, a couple of weeks ago in a few renewable energy stocks, so take a look.
There are also a couple of ETF recommendations. Coffee (JO), is up slightly from my buy recommendations months ago but has sold off some recently. If you recall, we had a bullish, long wheat ETF position on for quite a while, but existed in that position a few weeks ago when I saw improving U.S. and European weather.
corn and soybeans
My bias is to short any additional rallies in old crop May or July soybeans on improving South American weather again, but I am not putting this on the spread-sheet right now as there continue to be both bullish and bearish factors.
New crop corn and soybeans are awaiting the important March 31st intention report and then as we get deeper into spring weather will be much more of a factor. We have been friendly the May-Dec corn spread, with a bearish spin on new crop corn ahead of planting and improved Midwest weather, but given this spread has rallied back so much, it may be a bit late to do this
Keep in mind, however, it is a LONG growing season and there are some potential indicators of a hot, dry summer for Midwest grains, so any major break in December corn right now would only occur if there is a bearish March 31st report..
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