LA NIÑA AND COMMODITY ETFS–WEATHER REMAINS BEARISH NATURAL GAS AND MIXED FOR GRAINS

November 15, 2020

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LA NIÑA AND COMMODITY ETFs–WEATHER REMAINS BEARISH NATURAL GAS AND MIXED FOR GRAINS

November 15th, 2020

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Sunday morning November 15th

Introduction:

With the number of cases of COVID-19 expanding around the world and major demonstrations and resistance by many in America to fight the election results of new President-Elect, Joe Biden, it is possible that markets around the world will begin to react to this Chaos. This could affect the crude oil (and possibly the stock market) in the short term, among other things.

This report below talks about multiple commodity markets and ETFs. With respect to ETFs, my higher confidence trades remain to be short natural gas and hence being long the inverse natural gas ETF (KOLD) and longer-term, probably long either the ETF (CORN) and/or (WEAT) longer-term based on La Niña, global weather woes. However, I would not jump into LONG grain ETFs for the moment. While some of you may be long the coffee ETF (JO), I am unsure right now if Central American typhoons hurting coffee crops will be enough to offset good weather for Brazil coffee. Also, some rains may be coming to Russian wheat and Kansas to Texas within 10 days, so at some point, wheat prices may sell off again.

Go to the bottom of this report if you want to see our Weather Wealth spread-sheet and open trade ideas.

Development of La Niña poses dryness threat for major grain producers

Countries most affected by La Niña are usually the US, Brazil, Argentina, Ukraine, and Russia are among the top producers and exporters of corn, soybean, and wheat globally.

The La Niña phenomenon, which is an occasional but natural cooling of the equatorial Pacific, can results in weather changes worldwide.

Generally, Southeast Asia, South Africa, India, and Australia receive above-normal rainfall in event of a La Niña event, and drier weather is seen in Argentina, Europe, Brazil and southern US

Typically we see global corn and soybean yield decline during a La Niña year because it results in dryness in North and South America.

La Niña and crop areas to worry about most?

Notice all the dry areas (red) around the world. Read the map below. This is what I will be focusing in on deeper into winter and next spring for many commodities.

Wheat: Does our Longer Term Bullish View Still Hold With La Niña?

The wheat crops around the world will be made next spring. My long-range weather forecast software shows the potential for dry weather issues for wheat in the Plains, but we may need other weather problems around the world to get wheat prices sharply higher. Argentina and Russia have some weather problems, but in the short term, “some-time” within the next week, the wheat market may talk about some decent moisture coming again for the western Plains.

Coffee: Market torn between good weather for most of Brazil, higher Brazil Real, but more floods to hit Central American production

A major hurricane going towards Central America could damage crops, vs improved weather for Brazil coffee. If Brazil were to have had dry weather for a few weeks, coffee would be a screaming buy, but global fundamentals are mixed and confusing, for now.

The table above shows that the major harvest period for Central American coffee is from now into December-February. If it does not dry out following this huge rain event coming up, several million bags of higher quality Arabica coffee could be hurt. While South American weather has been bearish for coffee for weeks, it is still possible that the long coffee ETF (JO) could benefit from these historic Central America La Niña type late-season hurricanes. The Brazil Real appears to be stabilizing.

Rainfall in Central America could exceed 10″ the next few days, hurting the coffee crop

Vietnam has had 5 Typhoons this fall, but the weather forecast looks a bit drier for harvest heading into early December, so it is possible that the bull move in Robusta coffee might set back a bit if it does not turn wet again.

A look at the Brazil Real

In the aftermath of the US election last week, the dollar index turned lower. The prospects for a massive stimulus package under the new Biden administration weighed on the US currency. Meanwhile, the Brazilian real moved higher against the dollar, which could be the start of a long-overdue recovery. The question becomes the Pandemic, which has hit the Brazilian economy hard, as well as the Real. With the weaker dollar and a potential vaccine down the road, it is possible that longer-term, this market may move higher. If so, and with La Niña, then longer-term coffee could have upside potential, but in the short term, I am unsure, for now.

Natural Gas: Still like the bearish ETF (KOLD) with no extreme cold US weather

Late November-December Temperature Outlook given specific La Niña events

While strong LNG exports and some occasional cold snaps have sparked some short covering in natural gas, I remain cautiously bearish on this market into December. Climate Predict (above) shows the typical December weather looking at a composite of all La Niña events. Hence, another ETF that I recommended was buying the Inverse natural gas ETF (KOLD) a week ago, while staying short January call options for more aggressive traders.

South America and La Niña: Corn and Soybeans

Some of you have asked me about the long ETF (CORN) and (SoyB). When looking at the tight stocks situation, strong global demand, and this first map showing dryness in South America, that seems to make sense. However, the weather is only a partial factor right now and I want to see more widespread La Niña dryness develop first, and some kind of sell-off before jumping into this position.

There is enough rainfall coming up for southern and central Brazil the next 2 weeks (map below), that from a weather stand-point only, I do not want to get all caught up on the La Niña hope just yet for South American corn and soybeans. It is tempting to recommend a selling opportunity in corn and soybeans for now, but given China’s demand and many other factors other than the weather, I don’t have high confidence in this. Nevertheless, buying corn and soybeans on South American weather at these prices is a bit premature with the potential later for some weather problems.

Rainfall for southern Brazil is more than enough the next 2 weeks with up to 2-3″ of rainfall.

You have firms like Ag Resource who were bearish corn and soybeans, during the Iowa windstorm and mini-drought, then after a 10-20% rally, bullish at the top. They are talking about bullish weather in South American right now, and though this is possible later, I disagree for right now. There were some important rains over at least 50% of Argentina, over the weekend, and again, good chances of rain in Southern Brazil.

Weekend rainfall in millimeters hitting a few key Argentina grain areas. A lot more will be needed later and with La Niña the potential is there, later for some concern for Argentina corn and soybeans. I do not see the weather as bullish corn and soybeans , for right now in South America.

Hurricanes And La Niña: Looking ahead to global weather trends

Stay tuned in the weeks ahead, I will be looking more closely at some of these analog years below that had active hurricane seasons. However, as you can see 2020 has exceeded all other years.

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Southern Florida last week. Notice the car buried under 4 feet of water to this left of this Lamborghini.

Sugar: Break 15 cents on lower crops, Brazil Real

While sugar prices have rallied, I cannot say with high confidence that longer-term, buying the sugar ETF (CANE) is a good strategy as there is no high correlation with lower global sugar yields with La Niña.

India wants to continue to develop its ethanol sector and that could drive more of the sugarcane crop away from sugar and help to support local prices and reduce the surpluses that India is seeing in the market. The Brazil crop has been reduced by dry weather, but decent rains are on the way in the short-term. 

I have more than enough markets to advise on with respect to coffee, the grain market, and natural gas, but will update at some point about sugar. It is possible that another historical typhoon, this time hitting the Philippines, will add to lower global sugar crops that have occurred in Europe, Brazil, and Thailand from earlier weather problems. However, looking forward, La Niña may bode positively for crops in 2021 and may eventually pressure prices. So, I cannot get bullish sugar at these prices, and the ETF (CANE) strictly on the weather.

Commodity ETFs and Weather Wealth

CLICK ABOVE AND SCROLL ALL THE WAY DOWN TO OCTOBER AND NOVEMBER TRADES

COFFEE: Low confidence short term, mod confidence longer term

Traders took profits on 2x Long Robusta coffee on Vietnam Typhoons, but the hedged short position in the January $112.50 NY Arabica call option. It is possible that a major hurricane headed for Central America could support the Arabica coffee contract and the ETF (JO). However, I have low confidence in this right now due to the Pandemic and good rainfall for Brazil coffee. But longer-term, being long the ETF (JO) is probably low risk.

The spread-sheet will be closing this position with profits

Natural Gas: High Confidence (no change in comments)

I have maintained a bearish attitude in this market due to my warmer than normal late fall and early winter outlook. While this market has been volatile the spread-sheet has been short the January $3.70 call from 23 cents, two to three weeks ago and late last week bought the short nat gas ETF (KOLD)

Wheat: Low confidence short term, moderate confidence, later, longer term

While seasonally this market goes lower, the market has been supported again on weather issues for Plains wheat due to drought in some areas and also over 50% of Russian wheat areas. Traders sold the Dec $6.35 call option a few weeks ago for about 16 cents to hedge against long July KC Wheat. With rains in the forecast for Kansas to Texas within a week and the technical nature of the market, I am going to close this spread position tonight with some profits and wait on the sidelines. Longer-term, traders may be long the wheat ETF (WEAT), but I would not be surprised that some kind of sell-off happens within the next few days or so. IF, by spring, Russia and the US have drought issues, this market could soar later.

I will think about another trade strategy here within a week or two.

Corn/Soybeans: Would wait to buy these ETFs due to rains in South America

This market is affected by different factors every 5 minutes, but with rains coming to some key areas of South America. I am just looking for a trade from the short side for the next week to 10 days and also given the heavy long position. My bias is to wait for a modest rally if we get it and short it within the next 2-5 days based on some improvement in South American weather, but I am not adding any corn and bean trade to the spread-sheet. I am not sure when the market will react but if Argentina also gets good rains in about 11 days, then some profit-taking is likely.

Renewable Energy

See the spreadsheet for a renewable energy stock based on climate change that is ahead. Also, the stock NIO (electric car company) is up 2000% for the year and the spread-sheet was long last summer and got out. The market is overbought and there is an important profit-earning report early this week. My feeling is longer-term, this stock NIO will compete with Tesla, as China fights pollution and climate change. We look to re-enter this position by selling the January 2022 $28 put option on further weakness the next few days, for a potential 10-15% return.

Cocoa: Mod-high confidence longer term

Spread-sheet booked its third winning trade in a row short cocoa last week in call options. Longer-term I remain bearish on La Niña and the Pandemic.

Jim

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