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by: Jim Roemer | May 3, 2020
What Climatic Factors Are Needed To Rally Corn Prices? Developing Dryness In Vietnam For Coffee..
See this short video (above) of upcoming topics I will discuss. These include record low sunspot activity and the factors that will affect the grain market in the coming months.
A Preview of Upcoming Reports On Midwest Summer Weather For The Grain Market and Natural Gas
In the coming weeks, I will have more details and studies on the climatic variables that influence summer weather both for the Midwest grain belt and for natural gas.
I will look at the controversy/different viewpoints around the influence on global weather of solar activity vs. climate change. In addition, we are slowly seeing a transition to La Nina conditions.
Most dry Midwest summers have been accompanied by cooler than normal ocean temperatures at the NINO34 region for several months (La Nina conditions).
Cooling ocean temperatures at the NINO34 regions can sometimes bring hot summers for US natural gas regions and/or Midwest grain areas. However, most of the most intense summer droughts occur when the PDO (Pacific Decadal Oscillation) is negative.
The PDO and Summer Grain Belt Hot, Dry Weather Patterns
The PDO is often described as a long-lived El Niño or La Nina-like pattern of Pacific climate variability. This PDO pattern is marked by widespread variations in the Pacific Basin and the North American climate.
One of the key features of a negative (COOL) PDO is cooler than normal ocean temperatures off the California coast (arrow). This can result in Midwest hot summers and lower yields in US corn and soybean crops,
Below on the left are four Midwest spring and/or summer droughts and their associated ocean temperatures. The maps on the right are present ocean temperature variations. Right now we have a positive (WARM) PDO.
Summer bull markets in corn and soybeans, as a result of hot, dry weather, can occur with a positive (WARM) PDO, but they tend to occur much more often with a negative (COOL) PDO and/or a La Nina. Shown below are the Midwest hot, dry spring or summer weather patterns since 1983. Notice that all had cool ocean temperatures in the eastern Pacific west of California and a negative PDO.
The hot, dry Midwest spring and early summer and Midwest 1988 drought and negative (cool) PDO.
The 2011 developing Midwest La Nina drought and associated negative (cool) PDO.
The historic 2012 Midwest drought with La Nina and a negative (cool) PDO.
Negative PDO Years
Take a look (below) at the late spring or summer bull markets in corn in all four of the negative PDO years listed above (1983, 1988, 2011, 2012). Soybean prices also followed suit. In some of these cases drought began as early as April and May and traders and hedgers started the bull market early (2012, 1988). In the two other cases (2011, 1983) soil moisture conditions did not start deteriorating until June and July. This season, soil moisture conditions are ideal. It will take a transition soon to La Nina and a negative PDO to potentially see a hot, dry Midwest summer and a bull market. Again, right now the PDO is still positive and hence my overall bearish attitude in corn at the moment.
Corn prices can rally in spring and summer not just on hot weather or droughts but also on severe flooding such as in 2008 and 1983, which affected planting. However, they are more typical during droughts and heat waves.
COVID-19 Struggles In Brazil, Weak Brazil Real And Large Global Supplies Pressure Coffee
In my view, Bolsonaro is doing the same thing as Donald Trump: deflecting attention and responsibility of COVID-19 onto everyone else. Brazil now has the second highest number of cases of COVID-19 in the world.
Right now, the pandemic and lockdowns are having a negative effect on coffee and other markets. Many firms are raising their estimate of global coffee stocks.
We need a frost scare or major harvest delays in Brazil to get coffee prices out of the doldrums. I said last week that I did not like the action in the coffee market, to close out a conservative long position in coffee by exiting the short 95 cent July put, and that aggressive traders should basically scratch any short-term long futures position and be “nimble.”
The one market that is beginning to see a bullish reaction to weather is Robusta coffee. This is due to developing dryness in Vietnam, the #1 producer of instant, lower grade coffee in the world. I will try to take a look at Vietnam weather more closely by this Thursday’s report or sometime next week.
Right now given the market action and dry weather in Vietnam, I am going to recommend a buy in July Robusta coffee (traded in London).
Wheat Futures’ Feeble Rally Last Week May Not Be Justified
The Ukraine/Russian and German wheat crop may be lowered due to recent spring dryness. This was one reason for the feeble wheat rally in the middle of last week. However, forecasts for wetter weather for Ukraine and Eastern Europe pressured prices, as well as decent rains for Kansas (#1 wheat producing state in the US).
I had one trade recommendation in wheat a few weeks ago that was a winner (see Thursday report spreadsheet). A few wheat areas in far western Oklahoma and Texas still need more rain and drying weather is preferred in the eastern Midwest for both corn planting and for wheat development. I do not believe this alone is enough to warrant any major bull market in corn and wheat.
Big rains are coming again for key Ukraine and Eastern Europe wheat areas. Hence, again, I do not see the weather as a bullish factor in wheat at this point. You may have been hearing firms like AGResource and others tout the dryness in Russia for wheat, but I have disagreed for weeks. Most likely, you will hear “others” change their tune about the dryness soon.
With corn prices at such low levels ahead of summer, there always could be some weather risk summer premium built into the market. Until I see hot, dry weather, though, I maintain a bearish outlook for the new crop corn and short Dec. corn with modest confidence.
Old crop soybeans could rally on the outside markets and the reopening of the US economy. Overall, however, warmer Midwest weather and ample soil moisture will probably make it hard for any major rally in November new crop beans, for the moment.
My bias is cautiously bearish because of great rains coming for eastern Europe and Ukraine and seasonal lower prices. No new recommendation for the moment, but I don’t think that Kansas and Russian wheat yields being a bit lower than a year ago is enough to warrant a bull market.
Traders may still be long natural gas, in a very conservative fashion only, by being short the August $2.00 put at 18 cents more than a month or so ago. However, we need some sustained hot weather to get this market out of the doldrums. I will discuss the PDO, La Nina and possible suggestions for some hot summer weather within the next week, but for now, given the strong seasonal to be long natural gas (see below), I still advise a conservative long position by being short August puts (moderate confidence).
I am not following sugar or cotton at all right now, but more so coffee and cocoa. While there is a strong seasonal to be long cocoa currently, the weather is not really a major bullish factor. I am still looking at “potentially” the long side of coffee futures again at some point (especially Robusta) and will think about this a bit more. Both conservative and aggressive traders were advised to close out long positions prior to the break below 105 last Thursday in July futures (small loss) or short puts (small profits). (Arabica coffee futures)
NEW TRADE IDEA
Let’s buy July Robusta coffee futures for all traders. Most of you are probably unfamiliar with this market, and I can explain more about this on Thursday. But it takes roughly 3 -5 Robusta coffee futures contracts to =1 NY Arabica contract (as far as margin, etc.) to get the same amount of $ price profit or loss. In other words, for the same margin and for the same risk to reward as NY Coffee futures, you really need to buy at least 3 or 4 Robusta contracts for each Arabica contract. So, buying 1 Robusta contract is very conservative and perhaps a good way to get your feet wet.
(See the Thursday spreadsheet for open trade recommendations and recently recommended closed positions).
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