As Recession Looms, A Hot Midwest/Plains Summer Will Begin Impacting Some Commodities

by Jim Roemer | June 12, 2022

Introduction:

While geopolitical tensions, the war in Ukraine, and inflation have been major influences on commodity prices, the potential global recession is beginning to spill over into the stock market and a few commodities like coffee. Nevertheless, cotton, corn, and soybean prices are holding up very well in the midst of stellar demand, inflation, and now potential new U.S. weather problems developing.

My Best Weather Spider for corn will likely go to a +2 or +3 when I send it out Wednesday night or early Thursday.

This report focuses on the coming U.S. heat and how my recent studies may not be trading opportunities in grains, cotton, etc. with the potential western drought expanding.

Next week, I will discuss how a hot, dry summer in West Texas can be bearish the cattle market. While I normally do not advise in livestock as it is not always weather-reactive and I have way too many other markets to follow, I will make some quick comments about this soon.

We are about to enter the summer weather markets and some of you have annual subscriptions that are coming due shortly. These will be exciting times and you will be receiving renewal notices (if you have not already) about your subscriptions.

 

Record heat: Clues for summer?

More than 30 million people are under heat alerts, and more than 50 daily high-temperature records could be broken through the weekend – including in Death Valley, California, one of the hottest places on earth.

Dry conditions from the global warming-related megadrought and the third year of La Niña in the Southwest are helping to send temperatures soaring. This is a positive feedback loop because the heat in turn dries the region out even more.

 

 

Western drought and power blackouts should support natural gas prices

Yes, even these high natural gas prices, power blackouts, and strong LNG exports overseas may mean $12 natural gas prices this summer. I made a buy recommendation last week during the break to about $8.20 in natural gas to buy UNG or some sort of summer option strategy.

 

The nation’s power grid is under stress like never before, with regulators warning that the kind of rolling outages that are now familiar to California and Texas could be far more widespread as hot summer weather arrives.

A large swath of the Midwest that has enjoyed stable electricity for decades is now wrestling with forecasts that it lacks the power needed to get through a heat wave. The regional grid is short of the amount of energy needed to power 3.7 million homes.

 

Optimal early-season corn crop conditions but the psychology of summer heat should help prices rally

I was neutral to mostly bearish on corn the last month or so due to these excellent season crop prospects and my prediction that wheat prices at $13 would fall and potentially influence corn prices.

However, we are entering the most important time of the year for the U.S. corn belt and my forecast from a week ago (see past reports) discussed a possible hot, dry summer for some Midwest crops. This should begin to gain market interest in the corn and possibly soybean market.

My forecast above is for the potential for a dry July (red) in parts of the corn belt with Canada seeing good growing conditions for oats and spring wheat.

This high-pressure ridge, if stays around all of July would cause an exploding grain market.

While it is a bit too early to hurt the U.S. corn and soybean crop with such great soil moisture, the grain market should be looking ahead to this heat approaching the corn belt by mid to late June.

 

 

Global Atmospheric Angular Momentum goes Negative enforcing La Niña conditions

Without going into too much complex mathematic detail. Global atmospheric angular momentum has to do with the amount of torque with regard to the earth’s rotation. Rotating is normally slower at the equator and higher at the poles. Think of it as an ice skater. When a skater has his or her arms close to their body, they spin faster (North Pole), when the skater’s arms are further apart slower motion (equator).

Certain types of atmospheric conditions can increase or decrease angular momentum over the tropics. Lower momentum can cause a drag on the jet stream, decrease torque, and results in more La Niña type conditions. This can increase heat waves and droughts over parts of South America and the U.S.

 

We can see (below) that the Global Atmospheric Angular Momentum (GLAAM) is predicted to be negative. This causes a drag on the jet stream. Also, it helps to set up a potential, hot, dry high-pressure ridge as we head towards July.

GLAAM is negative for the rest of June. If it says this way for July, grain markets will be more weather-driven, than under demand and geopolitical forces.

 

As per my study (last week) about western droughts and La Niña, chances increase for some hot summer weather. Were it not for ideal U.S. corn conditions, I’d have put out a strong buy in corn a week ago. However, I have a new trade strategy on my Weather Spider today in the corn market.

 

Inflation rearing its ugly head affecting stocks and some commodities

The World Bank raised the risk of a global recession, warning economies may face a 1970s-like period of stagflation, characterized by slow economic growth and rising prices. The organization lowered its global growth forecast for this year to 2.9%, down from 5.7% in 2021. Growth is expected to hover around that figure through 2024, the bank said, citing disrupted human activity, trade, and investments due to pandemic lockdowns and Russia’s invasion of Ukraine. Read the report here.

Today’s environment of high inflation, weak growth, and supply-chain disturbances draw parallels with the 1970s when stagflation required increases in interest rates in major economies, which then triggered financial crises in emerging markets and developing economies. Still, there are differences now, including a stronger US dollar and stronger balance sheets at major financial institutions.

The World Bank advised policymakers to avoid export bans and subsidies, instead of focusing on accelerated debt relief and cushioning a spike in oil and food prices.

See my Weather Wealth report last Thursday a.m. before the major 5% sell-off in the U.S. stock market. While I’m not a stock analyst and don’t often make predictions in stocks (except those related to agriculture, and the environment of the natural gas-LNG market), I have been saying for weeks that selling call options against many of your long stocks is a way to: a) Avoid selling stocks and paying capital gains taxes; b) Offset risk by collecting premium if you are still long stocks.

If you want to understand more about what I am talking about, please email me at bestweatherroemer@gmail.com

Coffee prices collapse again on global economic concerns and no frost scares for Brazil

I am unsure at these prices if too much rain in Colombia will result in a short-term bull market this summer. Without a Brazil frost scare and the potential for a rebound in 2023 production next year, my bias has been in the neutral-to-bearish category longer term in the coffee market.

However, the coffee market could rebound at any time on tight supplies, the wet weather in Colombia (depending on the outside markets).

 

Barclays suspends sales for 30 IPath commodity ETNs.

Barclays halted sales of 30 iPath exchange-traded notes, nearly a month after an error forced the bank to halt redemptions of its oil and VIX futures notes. This actually happened in late April.

My apologies, one of my clients from Germany informed me that a couple of ETFs/ETNs I recently advised in (Shorting the coffee ETN JO and Buying the cotton ETN BALB) are not unavailable to trade.

See Weather Wealth trade ideas at the bottom of the page for some new trade ideas in active ETFs

That is a shame, because, while coffee prices have sold off 5% since my sell recommendation, cotton prices soared mid-week on the Texas drought and weak Indian Monsoon, before a Friday collapse on the outside financial markets.

Here is a list of ETNs not available to trade anymore

WEATHER WEALTH

ETFs:

Long UNG from about 28 last Thursday morning following the massive $1.50 break from Wednesday highs from about $8.20 early Thursday morning.

 

Short the wheat ETF (WEAT) longer-term from three weeks ago

 

Buy the ETF (CORN) heading into summer

 

Buy one of the ETFs

Yes, grain prices have already soared over the last year due to a combination of strong demand, South American weather problems, inflation concerns, and Russia’s war on Ukraine. However, weather should become more of a factor in some of these markets.

I am unsure about being long wheat as with harvest pressure approaching and good weather in Russia, I am longer-term bearish wheat, but these two ETFs give exposure to cotton, corn and soybeans which could be bullish on summer drought weather.

Hot summer weather with a Texas drought can sometimes be bearish for cattle futures, so not all of these commodities in these ETFs will be bullish but at least one of these ETFs should rally 5-0% this summer if we have higher corn and soybean prices.

 

 

 

Futures and Options: Weather trade ideas

New trade:

Buy 2 units of December corn and sell one unit of July CBOT wheat against it.

Buy December corn and exit any short position if you happened to sell the market the last few weeks on good early-season U.S. crop prospects.

 

Warm weather in Europe is hurting some of the wheat crop in France and Spain. It is possible there may be some concern about this vs. harvest pressure around the corner. Heat in Europe means more LNG exports for natural gas.

 

Recent trade ideas:

If you are short November soybean calls way out of the money, exit that position for now.

Short the December wheat $15 call from three weeks ago around 70 cents ($3500 a contract) for a longer-term trade.

Short the December $2.80 coffee call from 10 cents 1-2 months ago for a longer-term trade only

Long December cotton from the middle of last week

Some long option position in natural gas given such volatility and geopolitical uncertainty.

While I am not following the cattle market, summer weather is not necessarily bullish if the drought expands. I will explain more about this in the next week. Prices of cattle could go lower this summer.