IS FOLLOWING THE HERD A SMART THING IN COMMODITY TRADING?

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WILL ANY COMMODITIES SEE POST JULY 4TH FIREWORKS? DISCUSSION OF CORN BELT WEATHER AND PAST DROUGHTS

Jim Roemer | July 2nd, 2020 | Gold Sample Report

In This Report

In this report, I explain what is going on with the weather and market psychology. I am trying to keep more of a medium-term view about potential heat for natural gas, cotton, and, later on, corn and soybeans.

Welcome to all new subscribers. One key component of my on-line WeatherWealth newsletter is “education, education”. Many investors love to watch the gold, silver, and crude oil markets. At the same time, they may not be not familiar with conservative ETF trading in the grain and natural gas market. Weather has a huge impact on these and other commodities, especially in the summer and winter.

For example, the “conservative” longer-term cotton ETF (BAL) and potentially the all-grain ETF (JGG) can be traded through your Fidelity, Ameritrade, or other investment accounts. Given the “volatility” of weather models and psychology, this is the way to get your feet wet in commodities that you may not be familiar with.

For more experienced, aggressive traders:

we are going to see generally wild grain trading markets in the weeks ahead. The natural gas market has the same potential. However, I do believe this. After some short term rains in the Midwest later this week or weekend and temps not too hot (just yet) to cause great damage to corn and soybean crops, we most likely will enter a period from Mid July through August in which corn, cotton, and soybean weather will see some reduction in yields.

I also feel fairly confident (COVID-19 aside) that having some conservative long position in the natural gas market for the next 2 months is a safe play. Clients should be short the October $1.80 nat call put from about 18 cents a couple of weeks ago and possibly long UNG.

Weather Models

Weather models change all the time and can affect psychology and trading. Watch the video of what is going on with models. It also discusses what the corn and soybean market will be watching for the next 4-8 weeks. Does a heat dome starve off moisture to the Midwest?

This report then discusses some of the biggest bull markets in corn and soybeans. It looks at how watching the summertime dome, Midwest soil moisture, temperature patterns, and rainfall patterns are key to summer weather markets in grains. My own in-house, personal model that is used by farmers and food companies around the world suggests, especially before or by late July and August, a hot and potentially dry solution for some key Midwest corn and soybean regions and for Texas cotton.

PLEASE WATCH THIS VIDEO–GRAINS, NAT GAS AND COTTON

For this of you who are new to learning about the grain market. Here are some pointers:

The Midwest corn belt (called maize in many other countries), is located primarily from Nebraska to Ohio. One can see quite clearly that the US leads the world in production. China has much more irrigation than the United States but is depleting its water reserves. When we see Midwest droughts that are coupled with China grain needs and increased demand, that is when we see the greatest bull markets in corn.

Also, notice production in Argentina and southern Brazil. Their weather will be important come December and January. A developing La Nina could nip South American yields this winter (their summer).

regional corn output

The last real bull market in corn was during the infamous 2012 drought. You can see US production crashed. We did have a temporary bull market in the spring of 2019 due to planting delays. However, I became quite bearish corn after that. This was due to improved Midwest summer weather last year, worries over the trade war, big South American production, and COVID-19.

Currently, my bias over the next few weeks is to buy breaks in corn and soybeans. Short-term, though, we have to watch for rains and not extreme heat in the Midwest yet. This will result in some short term volatility in the grain market. Medium-term, again, I think there will be enough heat around and some dry pockets to prevent corn and soybeans from falling very far this summer.

US corn production.

A Look At Current Soil Moisture Conditions and NOAA Outlook

NOAA and many firms such as AgResource Company are looking at maps like (below) this. Their prediction? No drought or problem (white areas) for the Midwest grain belt through September! Earlier, I was preaching the potential for above-normal corn and soybean yields this summer. However, the record heat over the Arctic, combined with stronger potential La Nina signals, made me “alter that view” a week ago.

If this forecast by NOAA and some other firms is correct with no Midwest areas dry this summer (that is why they are in white), corn and soybeans will collapse all summer long. That is doubtful, in my opinion.

Season drought weather doesn't include corn belt

As of last week, one can see the generally optional sub-soil moisture conditions across most of the grain belt. However, Texas cotton areas are too dry and yields will drop.

Drought severity isn't hitting corn belt weather

China’s Historical Flooding

The weather in China usually does not have a big effect on the grain or cotton market until after harvest. Then they step up their import needs in the face of any weather disaster. This might happen with respect to the corn and cotton market longer-term, as severe flooding threatens Chinese crops. I will look more closely at this in the weeks and months ahead. Realistically, the Trade War, COVID-19, and many other factors are affecting the demand side of the equation in commodities right now.

China flood weather may impact corn

A Comparison Of Two Late Spring And Summer Bull Markets In Corn And Soybeans

Some bull markets in grains started prior to July because of early spring drought conditions and poor early crop development. Two such cases were (1988 and 2012), however, there were several other years.

Before people can get really excited about a 10-30% rally in corn and soybeans, we have to begin to see the psychology change. This would come from the development of more severe dryness in the Midwest. It was much easier to gauge corn and soybean market action during both the 1988 and 2012 summer droughts. We had hot, dry consistent weather over the Midwest and many more dry pockets than we have now. That is why the conservative route is trading the long side of corn and potentially beans. I will be discussing in the weeks ahead.

Crop moisture corn belt

For example, look at how early corn prices began to explode in 1988. We do not have this severe soil moisture problem yet. Otherwise, both corn and soybean prices would have been off to the races. Nevertheless, soybeans have rallied recently. This was not really on the weather. Instead, it was because of expected China demand and building “summer” weather premium, just in case of crop problems this summer. Notice how poor the corn crop was in early July 1988 and the excessive Midwest dryness.

December 88 corn prices.

There was sort of the same situation during the great drought of 2012. Notice how about 30-50% of corn and soybean crops in Illinois, Indiana, and Missouri were in poor condition as of late June. This year, conditions are a lot better. However, the grain market will look ahead to “what might be”, or not, in the weeks ahead. If crop conditions would fall to these levels in the next 4-7 weeks, then corn would have a chance to reach $4 and soybeans at least $10.

The bottom line is, in the short term, there is a lot of variability for Midwest grain weather and crops are generally good, but this could change in a few weeks. I will have more about this on Wednesday night or Thursday morning and my own in house models. I would prefer to see big-time heat and dryness in at least 4 corn/soybean states to get really excited and bullish. Models may not be heavy enough with rains later this week in some areas. I do see the potential for some summer crop problems a bit later— but likely not nearly as dire as the extraordinary bullish moves of 1988 and 2012

US drought monitor weather corn belt
Notice the drought by late June in 2012 over the heart of the Midwest. We do not have this yet.

Notice how soybean prices topped out prior to October 2012, even after a bullish USDA crop report on grain production. Why? I watched this happen in 1983 (when I had hair on my head and was a young, hipper-snapper) and in 2011 and 2012. This was because everyone and their dog (specs) were already long the market. In these scenarios, since the crops could get much worse unless there was a major fall freeze of wet weather for the harvest, it then becomes an “after the fact” scenario and harvest pressure ensues.

Soybean prices

NOAA and others are not calling for the drought to expand. However, I do think there will be crop issues, at least in the western corn belt. Notice how dry things are from Texas to Kansas and beginning to move into Iowa.

A couple of cool fronts will be over the Midwest later this weekend and next week. The areas shaded in yellow show developing dryness, but some of these regions will see at least some rain shorter-term. This is going to make grain trading volatile and not a consistent straight up bull market. It will not be like the 1988 and 2012 examples I showed above.

Rainfall US weather

A closer look at rainfall (percentage of normal for the last 30 days) reveals dryness in western Iowa and a few areas of the central and eastern grain belt. This is not nearly as bad as 2012, 1988, etc., but things could change in a hurray. It would be a lot easier to predict market reaction if we already had drought conditions as we did in those years and the ridge I talked about in the Video right over the Midwest grain belt. Again, I do think as we get deeper into July some crop problems will develop. In the short term, it is the far southwestern corn belt and cotton belt that have the greatest risk.

accumulated rainfall percent of mean weather

BOTTOM LINE

Covid-19 and questions about the demand side of the equation raise questions over the sustainability for higher cotton prices. However, the Texas drought and 110 degrees coming up, flooding in parts of China, plus historical pests in Africa that may “possibly” lower Indian and Pakistan cotton production later this year, make me moderate-highly confident being long Dec. cotton. I recently advised a conservative long position in options and the ETF (BAL) (See last Thursday’s report).

Everyone wants to know about corn and soybeans. Well, I have seen easier times in the summer, believe me. Will the corn and soybean market watch the chances for some needed rains in the western corn belt later this Thursday or Friday? Will it ponder the potential for extreme mid-late July heat in the southwestern and western areas? I think corn and beans will be volatile. This is not a day to day service with frequent short term updates. My advice recently was to tread lightly in a long grain ETF (JGG) and possibly buy September corn calls with limited risk, just in case we do see lower grain production this summer. I did not feel comfortable last week, with a long weekend and corn and soybean crops in pretty good condition right now, to recommend any aggressive long futures position just yet !!

This Thursday I am going to shed more light on the 2007 analog and teleconnections. I’ll show why I think this may be a good fit. Cotton yields in Texas fell sharply that year and soybean yields did fall, especially in August. If this forecast is right, any break in soybeans over the next 2 weeks (if that happens), would likely be a buy for mid-late July or August.

This kind of 2007 scenario also most likely will keep natural gas prices from collapsing over the next 6-8 weeks. With the east not as hot next week, this may not be quite a bullish situation for natural gas it otherwise would be. However, with 100-degree heat in the Plains and the calendar spreads way out of whack due to Covid-19, I think the nearby natural gas contracts have some “medium-term” upside potential this summer!

My overall bias is to look to buy breaks and weakness in most of these markets as we head deeper into July. But I want to look more closely at the Thursday/Friday western corn belt rain event mid-week and re-evaluate models before becoming too bullish corn and beans in the short term. I remain bearish wheat and have been, for the most part, for quite a while. I advised weeks ago for farmers to perhaps hedge wheat at higher prices. For spec traders, however, selling in the hole right now is not necessarily advisable.

There is no frost potential or wet weather right now for coffee. Hopefully, short-term aggressive traders may have heeded my advice two weeks ago about a short term buy, then took some quick profits.

Finally, take a look at the stocks (NIO) and (FCEL), or at least longer-term call options. These are two potentially longer-term bullish stocks. The world needs more electric cars and to capture coal. I mentioned these in some of my first Weather Wealth newsletters about 2-3 months ago.

Jim Roemer

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