WHICH PIECES OF THE CLIMATIC PUZZLE WILL INFLUENCE CROPS IN THE NEXT FEW MONTHS AND HOW TO PLAY THE CORN MARKET?
May 23, 2021
NOTE TO ALL CLIENTS:
This report I started writing on Friday and took me half the weekend with my research. I will have my typical Best Weather Spider and a private YouTube VIDEO sometime Wednesday or early Thursday and throughout the summer. Please be advised these next few months are the busiest time of the year for me and I may not always be able to respond to emails right away. I will have one of my assistants respond.
IN THIS REPORT:
A LOOK AT MAY RAINFALL TRENDS—DRYNESS FOR SOME WEST AFRICAN COCOA AND RUSSIAN SPRING WHEAT
COFFEE MARKET UPDATE
RECORD HEAT HITS THE EASTERN U.S. BUT IS IT ENOUGH TO RALLY NATURAL GAS?
THE INDIAN DIPOLE. WHAT IS IT AND HOW IT INFLUENCES TROPICAL COMMODITIES
AUSTRALIAN WEATHER UPDATE
WHAT CLIMATIC VARIABLES WILL INFLUENCE CORN AND SOYBEAN BELT SUMMER WEATHER?
THE GRAIN ETF TAG (FOR NOW) HAS LITTLE ADDITIONAL UPSIDE POTENTIAL AS MOST WORLD GRAIN AREAS SEEING IMPROVED WEATHER
BIG RAIN/SEVERE WEATHER EVENT FROM IOWA TO ILLINOIS AND Southern WISCONSIN LATER THIS WEEK
RUSSIAN SPRING WHEAT AREAS GETTING TOO DRY
WEATHER WEALTH TRADE AND MARKET IDEAS (ALWAYS BOTTOM OF THE PAGE IF YOU WANT JUST MY IDEAS OF THE MARKET ONLY)—many markets to watch
A look at May rainfall for global Ag Commodities
It is becoming too dry for Russian spring wheat, as well as west African cocoa. This may support cocoa and spring wheat prices in the weeks ahead, though parts of the northern Plains and Canadian spring wheat drought is still slated to get some rain. I remain bearish new crop December corn and new crop soybeans on price rallies due to good early season planting weather and ample soil moisture in the Midwest.
Two weeks ago, coffee prices stalled in the $1.50-$1.57 zone, after a gallant 25% rally during recent months. I have been bullish coffee on the Brazil drought for 4 months (see bottom of the page for trading ideas).
Conab said output would fall as Brazil’s coffee trees are in the lower-yielding half of a biennial cycle and that insufficient rain in key stages of crop development is exacerbating the decline in yields. Marex Spectron, on March 5, raised its global 2021/22 coffee deficit estimate to -10.7 million bags (from a prior -8.0 estimate), citing reduced output from Brazil after tree damage from adverse weather.
Last week, however, Abundant short-term coffee supplies were negative for prices as ICE supply numbers have been trending higher over the past seven months. On Friday, ICE arabica inventories rose to a 14-month high of 2.05 million bags. Also, the Brazil Real fell to a two-week low last week.
Nevertheless, look at these two charts from Shawn Hackett of Hackett Financial Advisors. This reflects the tightness in the market that should be occurring deeper into this year.
In some key Brazil coffee areas, rains (later this week) and above normal next week may generate a bit of psychological bearishness in the market. It is TOO LATE to help the crop at this point! More importantly, there is the seasonal possibility of a frost scare in the weeks to come. Such an event is rare these days, due to a warming global climate and the fact that the coffee region has been migrating northwards. Another matter to ponder… will it turn too wet for the Brazil coffee harvest? Stay tuned.
unusual hot weather hitting the eastern U.S. but, is it enough to rally natural gas prices?
Natural gas prices took out resistance early last week on ideas of bullish EIAs, technical buying ahead of summer, LNG exports, and a recovering post-COVID economy. However, seasonally natural gas prices go lower into June unless we have sustained heat.
Stay tuned. I will do more updates about the summer forecast and hurricane season soon, but right now, I am very focused on the grain market and coffee.
Last Thursday’s weekly EIA storage report was bearish for nat-gas prices as U.S. inventories, in the week ending May 14, rose 71 bcf to 2,100 bcf, above expectations of a 59 bcf increase.
(1) the economic damage and reduced nat-gas demand caused by the Covid pandemic, and
(2) the warm U.S. winter that resulted in weak demand for natural gas for heating.
(1) strong foreign demand for U.S. nat-gas as flows to U.S LNG export terminals on April 18 rose to a record 11.921 bcf (data from 2014) and after U.S. LNG exporters loaded a record 81 cargoes in November, breaking the previous record of 75 (set January of 2020),
(2) expectations that the low level of oil prices will reduce shale drilling and natural gas extraction as a by-product, and (3) tighter U.S. nat-gas supplies that are down 16.1% y/y and -4.0% below their 5-year average
WHAT IS THE INDIAN DIPOLE? how DOES it affect tropical commodities?
During the positive phase of the IOD (like what happened in the Southern Hemisphere winter and spring of 2019, above), cooler-than-normal sea surface conditions in the eastern Indian Ocean near Java and Sumatra accompany warmer-than-normal conditions in the western tropical Indian Ocean. This helped to bring locusts and historical floods to East Africa and drought for Australia with brushfires that killed millions of animals. Of course, Climate Change and El Niño exacerbated this situation.
In the above image, notice how, during the positive phase, there is a tendency for drought in Australia and flooding in Eastern Africa.
Currently, the IOD is in a neutral phase. This makes it difficult to forecast for some parts of Australia, Africa, and Eastern Asia. A complication is that La Niña has been weakening towards neutral. Easier long-range forecasts occur when we have either a distinct El Niño/La Niña event and a strong positive IOD or negative IOD.
Notice how, come summer, the IOD is forecasted to be negative. What may this imply for weather and some crops?
CONCLUSION: It is a bit early to trade tropical commodities strictly on the Indian Dipole (IOD) because it is presently neutral. If it goes negative later this summer and fall (warm oceans over Indonesia and cooler oceans east of Africa), the opposite of what happened two years ago with the devastating drought for Australia, then: A) Much of Australia, including the drought-stricken west, will see improving moisture conditions heading through their winter and next spring; and B) Global cocoa production could fall further this year and potentially support prices later on. However, we need to also see ocean temperatures cool south of West Africa in the Gulf of Guinea (negative TSA), to see consistent major crop problems for cocoa (stay tuned); C) Sugar crops in India and Thailand may fair well this summer.
There have been questions from my Australian clients about some dryness returning to this great country. You will notice that, as the wheat crop is in dormancy during their winter, the moisture situation has gotten a bit dry again in some areas. After a stellar, record-breaking crop last year, following the devastating one in 2019, you can see where the problem areas are.
My in-house weather software (below) looks at 28 global teleconnections such as El Niño, La Niña, Indian Dipole, and much more. I will discuss more in a few weeks, but it is the Antarctic Oscillation Index (AAO), Global Atmospheric Angular Momentum (GLAAM), and NOT as much El Niño or La Niña that will influence their winter in the next few months.
The Indian Dipole is not that important for June rainfall in Australia, but deeper into their winter, it is. I will discuss more about this, later.
If models are correct (with a negative Indian Dipole from August to October), notice the improved rainfall prospects later this year for Western Australia. (below). I will address this more, in due time with my Climate Predict weather forecast models.
US CORN/SOYBEAN BELT AND WHAT WILL INFLUENCE SUMMER WEATHER
Stay tuned in the coming weeks. We need to address two teleconnections that will determine whether we have a summer bull market in corn and soybeans and a return to hot, dry weather. They are La Niña and the PDO.
Below, you can see the forecast by the Japanese Model for ocean temperatures in the El Niño/La Niña region near Peru and also something we call the Pacific Decadal Oscillation Index (PDO) that addresses ocean temperatures in the northern Pacific.
In all seriousness, with the Japanese model and my Climate Predict models, I have the most confidence in predicting global ocean temperatures. You’ll Notice the “cool signal” near Peru and lingering weak La Niña conditions. In addition, we need to see the PDO be more negative (cooler), off the California coast.
If these two scenarios happen then summer heat and dryness would lower U.S. corn and soybean yields and also create a hot summer for the natural gas market. Right now, I remain bearish new-crop December corn and November soybeans.
WHY WHEAT, CORN, AND BEANS SOLD OFF THE LAST WEEK
The Grain ETF “TAG” Will Only Rally Back If We Have Summer Weather Problems
Some folks are “at a loss” as to why December corn, November soybeans, and many wheat contracts sold off last week, in the face of some of the tightest grain stocks ever, previous technically bullish chart patterns, a drought in Brazil, and areas of dryness you see here in the NW corn belt and spring wheat belt heading into Canada.
After all, Chinese demand for grains has been historically strong. However, this is the time of the year that traders look at northern Hemispheric weather, and other than some weather problems for Russia’s spring wheat belt, most European, Ukraine, and U.S. crop areas have, or will be seeing, improved rainfall and mild temperatures. The latter events are good for early-season corn and soybean planting and germination.
In the last “two” weeks, my reports explained why I was bearish at least new crop corn, and possibly, wheat and less bullish new crop soybeans (go back and see those last reports). Notice, how models have trended wetter for most U.S. grain areas into early June. This helped break the grain markets.
The PDO is often described as a long-lived El Niño-like pattern of Pacific climate variability. As seen with the better-known El Niño/Southern Oscillation (ENSO), extremes in the PDO pattern are marked by widespread variations in the Pacific Basin and the North American climate.
This oscillation is a pattern of change in the Pacific Ocean’s climate. The PDO is detected as warm or cool surface waters in the Pacific Ocean, north of 20°N. During a “warm”, or “positive”, phase, the west Pacific becomes cool and part of the eastern ocean warms. Conversely, during a “cool” or “negative” phase, the opposite pattern occurs. It shifts phases on at least an inter-decadal time scale, usually about 20 to 30 years.
Notice the cool ocean temperatuers (negative PDO), below. This was back during the big 2011-2012 grain belt droughts. Will this happen again this summer? Stay tuned.
SEVERE WEATHER OUTLOOK MIDWEST GRAIN BELT: ANOTHER DERECHO?
Remember 2020’s historical August “Derecho” (wind storm), which damaged millions of bushels of corn from Iowa to Wisconsin? This put a low in the corn market late last summer. Then, a lower Ukraine crop, La Niña, and Chinese demand set the fall and winter bull market into a frenzy
The maps below are this week’s storm (not last summer). Heavy rain, hail, and tornadoes may make national news by Thursday. Overall, other than some minor flooding, should probably NOT be a bullish impetus to the corn market, like it was last summer when corn was feet tall (of course) in August and blown down by the wind.
ANOTHER POTENTIAL PROBLEM AREA TO WATCH FOR GRAINS: RUSSIAN SPRING WHEAT AREAS TOO DRY
After a stellar collapse in wheat prices due to my forecast, weeks ago, of improving European, U.S., and (potentially) Canadian weather, prices found support on Friday. Seasonal bearish factors ahead of the U.S. harvest and the outside markets also contributed to the price slide. But then, prices reversed. I am unsure right now, whether the dryness in western Russia and the Volga Valley “might” have been a reason that wheat prices found support. It could be more likely that the oversold market condition had reached its psychological limit.
There are still some drought areas in North Dakota, Minnesota, and Canada that need rain. However, while some rain is in the forecast for the next two weeks, my in-house weather software, Climate Predict, suggests that crop stress and some potential reduction in the Russian winter and/or spring wheat crop could occur in the next few weeks.
Russian spring wheat only accounts for a fraction of world wheat production. It is possible that the dry weather could keep some wheat prices from falling very far. I would have more confidence in this “if” needed rainfall for parts of Canada and the northern Plains were not coming.
Which Climatic variables are the keys in forecasting summer rainfall for Russian spring wheat? It’s not what you may think. A little-known phenomenon, the Eurasian Index (EA), is one of the most significant factors. When the EA is positive the correlation (above left) is -1.17, or a dry signal. The MJO and several other teleconnections are also quite important. I will address this soon
West African Cocoa areas bear watching
June and July weather is critically important for west African cocoa production. West Africa grows 65% of the world’s cocoa for producing chocolate. What are the major climatic factors for west Africa and could we finally see a bull market? It is becoming a bit dry as the maps show below. You can see, below, that crop stress is developing. The problems are twofold: we do not have an El Niño, and, water temperatures south of west Africa (TSA) are warmer than normal. Otherwise, I would be super bullish on cocoa
Stay tuned, I will do a special report next week about this. However, the four most important teleconnections that could cause crop damage in west Africa and bring about a bull market are 1) El Niño; 2) A negative TSA; 3) A negative Indian Dipole (IOD); 4) The MJO in a dry phase.
Notice the dryness developing versus last year. It is not a problem yet, but, if dryness lasts another few weeks, it would begin to compromise the main cocoa crop in Ivory Coast and Ghana.
CORN: STILL BEARISH ON IMPROVED MIDWEST WEATHER, RAINS FOR BRAZIL. HOW TO PLAY THIS MARKET?
The improved Midwest weather coming in the next couple of weeks, combined with the above report above showing possible increased corn acreage, has helped December corn plummet 45-60 cents since I mentioned my bearish attitude. At one point last week, corn had sold off 70 cents. The whole summer is still ahead and some forecasters are calling for “a hot one”… So, there is a lot of premium still left in this market.
Given the foregoing, how do you play corn, in my opinion? Two ways come to mind. If you are short December corn on my advice two weeks ago, you are ahead at least $2,000-$3,000 per contract. Should Russia’s spring wheat area experience dryness, and, should strong demand still persist for old crop corn, I would recommend the following, as food for thought:
A) Given all the volatility right now in the grain market and the fact July corn has a bullish seasonal in June, with just 4 weeks left in July corn options, sell the July $6.30 corn put and sell the July $7.20 corn call (at least 1 contract each) against short Dec. corn futures (this gives protection and profit potential in the July contract, due to volatility). This strangle will bring in about 25-27 cents ($1200 a contract) and great protection against short Dec. corn futures with profits the last couple of weeks.
B) Though my confidence is only moderate on this because some areas of the Canadian and North Dakota spring wheat drought will be easing, July spring wheat may have made a key intraday reversal late Friday. Buy July MGE spring wheat (moderate confidence, not high) and risk the recent lows (about 15-20 cents) against short December corn.
SOYBEANS: Improving U.S. planting weather and technical selling pressure market last week.
See my weather spider early last Wednesday a.m. (-2) before the price collapse the last few days. Improving U.S. weather during early planting and an over-bought market has helped to pressure prices. I advised, a week and a half ago, if you were long the soybean ETF (SOYB) to consider lifting at least part of this position. If we get into the summer heat and dryness then I would reconsider this ETF later, but not now.
WHEAT: MY BEARISH VIEW “FINALLY” COMES TO FRUITION, AS WORLD WEATHER AND CROPS IMPROVE
My reports two weeks ago kept mentioning a bearish attitude in wheat, during this critical time of the year for global crops. The collapse finally happened in the last 2 weeks. A huge Kansas wheat crop and good rains (even with the spring and winter freezes – wheat “has 9 lives”), plus some improvement in the spring wheat areas of the Northern Plains and Canada, plus great rains in Europe, all had me bearish.
I am not sure how much lower prices have to go. There still may be a “few problem areas” for the northern Plains or Canada spring wheat, but, there are rains coming. My one concern is in Russia’s spring wheat areas. Traders may look to buy July MGE spring wheat and sell July CBOT wheat against it.
A few weeks ago, wheat prices were rallying on inflation fears, concerns over the spring wheat drought in the Dakotas, Minnesota, and Canada, and dry weather in France. However, I stuck with my guns on my weather spider with anywhere from a (-1 to -2) slightly bearish sentiment. In fact, last Sunday night I said the weather was bearish spring wheat and prices collapsed last week sharply. Global crops are improving and, with the harvest around the corner, we have been bearish.
Right now, I am unsure about this market as we have broken a ton. Again, if the drought would continue across North Dakota and Canada with no rain the next few weeks, I would have my spider at least a +2 and would give a strong buy recommendation. Nevertheless, with dryness in Russia, buying July spring wheat might work, especially against short November soybeans or December corn.
NATURAL GAS: Seasonal factors and mild weather pressure market after making new highs early last week
Prices have gotten to the point that if hot weather would continue through June and July, I would be apt to recommend buying the ETF (UNG) and going long futures longer term ahead of the hurricane season. I want to do more research on summer temperatures before having a high confidence trade in this right now. Stay tuned. My recent advice (several weeks ago) was that prices above $3.00 were probably too high with a bearish outlook due to seasonal tendencies and no lasting extreme heat. Too late to sell in the hole now, unless I see a cool summer, later.
SUGAR: Market watching the brazil real and some easing later this week in the brazil drought
My weather spider last week went from +2 bullish on the Brazil drought to neutral, given market action and some rains coming to key areas of Parana/São Paulo in the next week. But it is the Brazil Real weakening and other outside factors that pressured this market. I had advised a few weeks ago buying sugar and prices were ahead about $1,000 a contract in July futures before the price collapse.
COFFEE: prices reach my $1.50 objective from 4-5 months ago. weather is only a partial factor for now, BUT COULD BE BULLISH LATER
I still like the ETF (JO) longer term, which is now up about 15-20% and short the September $1.30 coffee put, which I advised two weeks ago prior to the explosion in prices early last week. Prices already reached my objective of $1.50+, so easy money has been made. There is a chance that prices could get to $1.60-$1.70, eventually. However, we would need the Brazil Real to rally or some new weather problem.
COCOA: Choppy price action and too many factors to have a strong feeling in this market
I am tempted to recommend a buy in cocoa, but, the ongoing European pandemic, plus demand worries, not to mention a big west African mid-crop, are all bearish. If we had an El Niño and the Indian Dipole already negative (see report above), I would then take more of a longer-term bullish view. I am unsure about this market right now. It is possible that some recent heat and dryness could put a floor on this market.
ORANGE JUICE: an ultra-thin market to trade, but lower brazil crop and hurricane season may keep prices from falling
The OJ market has seen very limited volume and a lack of players the last 10-15 years because Florida is no longer the #1 producer in the world (Brazil is), and freeze scares and hurricanes have little effect on the Florida crop as they once did, earlier in this decade and especially 20-30 years ago.
However, with the weaker dollar, a Brazil drought, and the technical nature of the market, one may consider buying November OJ with moderate confidence. Remember, there is very little open interest in this market. This would be more of a longer-term trade, just in case we have an active Florida hurricane season, but I need more confirmation that next year’s Brazil crop was hurt – it may very well be.
COTTON: Market rallies last week on major flooding in gulf, texas dryness and record heat in the southeast
Early-season crop issues rallied December cotton. I look for improving weather for Texas, deeper into May. I will discuss this within the next week. However, I do not want to recommend buying December cotton on the weather right now.
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