BUY ON RUMOR SELL ON FACT IN COFFEE; WEATHER TURNED NET BEARISH CORN AND SOYBEANS LAST FRIDAY BUT NOT WHEAT; NAT GAS WEATHER AND MORE
August 2nd, 2021
A beautiful picture of some frost in S. Minas Gerais coffee areas last Friday. However, the main belt is further north, and since 1994 production has expanded north in Brazil. This is one reason for the massive sell-off in coffee prices
Coming up in my next two reports:
August 4th or 5th: Jim Roemer’s Best Weather Spider commodity sentiment & Video about global markets and weather & WHAT IS DRIVING OJ PRICES?
August 8th or 9th: La NIñA may be returning, but they are not all the same. A look at potential coffee, COCOA and South American corn crop weather deeper into this year
in this report:
COFFEE: PRICE COLLAPSE ON “BUY THE RUMOR, SELL THE FACT” – ON FROST. WHERE DO WE GO FROM HERE?
WHEAT: MODEST RALLY ON GLOBAL DROUGHTS, BUT RAINS COMING FOR CANADA AND THE NORTHERN PLAINS SOON.
CORN & SOYBEANS: WEATHER IS NET BEARISH PER MY COMMENTS LAST FRIDAY. HOWEVER, CROP CONDITIONS ARE WORSENING. PRICES MAY RALLY INTO MONDAY EVENING’S CROP CONDITION REPORT.
RARE EARTH METALS: THEY ARE IN DEMAND.
THE CRB (COMMODITY INDEX): WHAT IS DRIVING IT TO NEW HIGHS?
NATURAL GAS: RALLYING BACK AGAIN ON HOTTER AUGUST WEATHER FORECASTS.
Coffee: price collapse on “buy the rumor, sell the fact” oN frost. Where do we go from here?
See the beautiful picture on the top of the page of the frost last Friday in southern Minas Gerais.
My apologies to any of you that could not handle the recent volatility in coffee prices. The market turmoil sprouted from various weather fundamentals and the heavy net long positions. Such was the underlying cause of the massive liquation in coffee futures last week. Remember these two graphics I sent “before” the near historic 2-day coffee collapse. The down-move was 13% in two days.
OK, was my forecast wrong for another frost? Yes and no. On one hand, major additional crop damage likely did not occur. Yet, the fact remains that this was the first time ever that three frosts hit Brazil coffee in one winter.
You combine that with stocks projected to be at extremely tight levels, continued drought in Brazil and that most specs are now washed out of the market, and weather will become much more important again to this market, late, but not right now.
BUT we need a fall (Brazil spring-summer) weather problem as we did following the 1975 frost. Will it happen and what does the 2nd year of La Niña suggest? Stay tuned. But it is quite possible that dry weather in September could reignite this market again, once all the specs are washed out.
However, take a look at the seasonals towards the bottom of this page. Note that coffee prices do tend to go lower in August. Also, new COVID19 worries that could affect demand also were major reasons for last week’s sell-off.
(Remember: I sent this out last week when coffee prices were above $2.00 per pound). Prices have collapsed 12-15% since then as specs run for cover.
PLEASE ALWAYS TAKE INTO ACCOUNT SOME OF THESE WARNING SIGNALS OR IDEAS WHEN TRADING AND LIMIT RISK
By any means, I certainly did not recommend short-selling coffee. However, I was worried about anyone taking an actual long futures position “after the rumor.” Notice how we filled the gap on the charts below.
There are no new frost scares for Brazil so weather is more of a background factor. Nevertheless, it may take weeks to determine how badly the present drought and recent frosts have on the 2022 crop. What will happen with La Niña coming back? Stay tuned.
The next area of support on the charts is $1.70 in Dec. coffee
WHEAT: MODEST RALLY ON GLOBAL DROUGHTS BUT RAINS COMING FOR CANADA AND THE NORTHERN PLAINS SOON
It has been wheat that I have been most bullish on due to some renewed global weather problems. This is especially true for spring wheat. The possibility of La Niña coming back is already worrying some wheat traders, as well as inflation fears.
These two droughts and more wet weather hurting parts of the European wheat crop have kept me bullish wheat again the last two weeks. This is especially so for spring wheat. Monday evening’s crop condition report will show more deterioration to the wheat crops, so wheat prices should be higher today, Monday, and again perhaps tonight.
The radar above showed some important rains in Alberta late yesterday. The second map shows up to 1-2″ of rain in some important spring wheat and Canadian canola areas for the next 10 days. This, plus the heavy long spec position in canola helped to break this market last week.
While I would love to keep a longer term bullish perspective in wheat, many of these markets right now are hit and run and with some increase in rains within the next week in some N. Plains and S. Canada spring wheat areas, I am not sure but I think MGE spring wheat would be subject to some profit-taking. Again, global wheat crops are coming down right now.
CORN & SOYBEANS: WEATHER IS NET BEARISH PER MY COMMENTS LAST FRIDAY, BUT CROP CONDITIONS ARE WORSENING. PRICES MAY RALLY INTO MONDAY EVENING’S CROP CONDITION REPORT.
Last Friday a.m., I put out a more bearish outlook for corn and soybeans, and prices collapsed. They were lower early Monday morning. The reasons for my bearish attitude (contrary to other services out there) are the following:
*70% (or more) of the Midwest grain areas are NOT in a drought. Prices at these levels are potentially at fair value
*Everyone is sitting around waiting for a rally due to very tight stocks of corn and soybeans. The market knows this already
*Rains hit some key areas of the western corn belt Friday and over the weekend and central and southern Illinois. This was in my forecast last week
*The maps below showing generally normal rainfall over a good part of the Midwest grain belt in the next 2 weeks. This is despite the fact that there will be hot temperatures again in the west. The heat is helping natural gas prices to rally again but not corn and soybeans
But here is what is confusing and what I have been concerned about for a month. There is still some big-time heat coming to the western corn and soybean belt, deeper into August. In addition, Monday evening’s crop condition report will probably show more deterioration in the corn and soybean crop as not all areas got rains last week.
I told farmers to hedge the rally in corn and soybean prices last week and some of you took my advice and read between the lines early Friday and sold this market. The reasons I mentioned above are bearish corn and soybeans, but volatility may remain. Look for prices to possibly recover a bit Monday night or Tuesday on the NASS Monday night crop condition report. Nevertheless, without sustained dry weather over a larger area, I am not overall bullish on these markets. VOLATILE, VOLATILE
RARE EARTH METALS: THEY ARE IN HIGH DEMAND.
At Weather Wealth, I am constantly looking, not only at commodity weather but investment opportunities in renewable energy (electric cars) and environmental space. Believe it or not, the global green economy is here and the EU just agreed on going to 0% carbon by the year 2050. They signed a pack last week. This helped this particular ETF soar again.
REMX is the leading ETF in trace and rare earth metals. While China controls most of this market, countries like Greenland are sitting on huge reserves that will drive more technologies in Climate Change adaptation (electric cars, etc., etc.)
I recommended a buy in this (actually several months ago) and again in early July. Prices soared about 10-15% last week.
WHAT IS DRIVING THE CRB (COMMODITY INDEX) TO NEW HIGHS?
Even In the midst of all the crazy volatility in the U.S. dollar, corn, soybeans, and especially coffee the overall longer-term bullish commodity cycle remains intact. However, given some improving global weather for some commodities, worries about OPEC again, and COVID, I would not necessarily be buying such a rally now, it is a little late.
While I am not an expert in crypto currencies and metals (of course), I did warn, a couple of months ago, about the “overzealous” nature of Bitcoin, etc, and that it was likely due to having a sharp correction. This has indeed happened. Inflationary fears have shifted investors to metals again. The weaker dollar over worries about new COVID-19 cases are potentially bullish commodities, in general.
More recently, it has been crude oil, cattle, and wheat that have to lead the pack higher. It was the wheat market, which my previous weather spider was potentially most bullish on. Indeed, we had a nice rally the last week or so on renewed global weather issues for wheat crops.
NATURAL GAS: rallying back again on hotter august weather forecasts
While cooler weather in the eastern U.S. this week and an overbought market, warned me to tell you to take profits on long natural gas positions around $4.10 a week ago. Also, there are no big hurricanes on the horizon for now.
However, renewed La Niña signals and hotter maps are helping natural gas prices again.
The SOI index is a factor in whether (or not) we have a La Niña or El Niño. the index is trending more positively towards La Niña again. This is helping to build some August heat later.
a look at August seasonal trades
I often look at seasonal trades and then look at the fundamental and technical picture of a market to make specific recommendations. When all three of these variables line up (especially when the commitment of traders is heavily long or short a position in the opposite direction of an upcoming seasonal trade), I refer to this as a HIGH CONFIDENCE (A) TRADE.
Notice that selling coffee in August has worked in 14 of the last 15 years. This is a bit unnerving, so let’s consider the reality. Coffee stocks are extremely tight and any little additional weather problem later this year could send prices soaring, later.
Other weather-related markets are cocoa and corn and I will address more of this down the road.
COFFEE: TYPICAL MAJOR WASH OUT IN THIS MARKET AS PRICES ALREADY BUILT IN CROP DAMAGE AND TOO BIG OF A NET LONG SPEC POSITION
A buy-on rumor sell-on fact situation in coffee as additional frost damage is subject right now. After at least three winning trades in the long ETF (JO) and various coffee options the last 6 months, this was the first loser. However, I did warn traders to “be careful last week” and probably not trade futures, by Thursday a.m.
Traders may be long the “conservative” December $2.00-$2.50 call spread from the last month and at one point were ahead $2,000 a contract a week ago, before the price collapse. Traders may also be long the ETF (JO), though some of you took anywhere from 30-50% profits off and on the last few months on the Brazil drought. I also did not think prices for coffee would get much below $1.80 for December and selling the $1.80 put would be a low-risk trade.
This is very complicated right now. We will have to wait to hear of reports of any new crop damage (or not). Also, we need to see dry September-November weather in Brazil to foster a major rally. Stay tuned. Coffee prices normally go lower in August.
At some point this year, I think the market will fret about the possibility of another drought for Brazil coffee. This will happen when the last spec long trader gets out of the market.
GRAINS: IMPROVED MIDWEST RAINFALL FORECAST PRESSURES CORN AND SOYEANS WHILE GLOBAL DROUGHTS HELP WHEAT PRICES.
I turned bearish corn and soybeans late last week again and some of you may have shorted corn and soybeans earlier on Friday before the price collapse.
I look for today’s weekly crop report to show some decline in crop ratings. Hence, you may want to take profits on short positions today if you read between the lines and sold corn and beans last Friday. Nevertheless, I am overall neutral to bearish these markets for August without sustained dry weather in more areas. However, beware of the USDA crop reports coming up, along with extreme heat in the western corn belt. These will create market volatility and short-term trading opportunities.
The only grain I was more bullish on is wheat and would look to take some profits by tonight or tomorrow on further price rallies in MGE spring wheat. I am not sure if rains in the NW Plains and Canada coming up will put a more bearish spin on spring wheat, later. Overall, fundamentals in wheat are more bullish than corn and soybeans in my opinion.
NATURAL GAS: LA NINA MAY BE COMING BACK WITH MODELS TRENDING HOTTER FOR AUGSUT
Took profits on the long ETF (UNG) and (BOIL), hopefully before the price sell-off late last week. The overall fundamentals for natural gas are probably bullish longer term. This is despite the fact that (in the short term) I was unsure late last week and expected a sell-off in prices.
OTHER MARKETS: WILL UPDATE MORE DOWN THE ROAD
The OJ market may have sold off late last week because of no hurricane rumors for Florida and over-bought short-term market and frost damage in Sao Paulo probably minimal to oranges. The drought in Brazil could still rally prices again later, so I would not let prices get much below $1.25 if you bought this a few months ago.
I will take a look at cocoa, cotton, and sugar down the road when I have more time.
ETFS: WHEAT STILL LEADING THE PACK AS FAR AS #1 WEATHER MARKET
I still like a diversified basket of energy, metal, and grain commodities as I suggested months ago. However, the Ag markets are mostly too volatile to trade right now.
Two weeks ago, it was wheat that was my weather Spider’s #1 grain. It has rallied back about 6-10%. I am not sure if in the next few days or so, improved weather in Canada may pressure the wheat market a bit given the drought in Russia.
I recommended getting out of the natural gas ETFs UNG and BOIL though longer term I am still bullish but do not recommend buying this rally again.
The long ETF JO will have to wait till Brazil drought weather becomes more important again by September and October. IF we see the drought continue then prices would explode. The tight supply-demand situation and frosts are OLD NEWS. We need some other impetus.
With Jim Roemer
2 week free trial
• Weekly global commodity weather and crop outlooks
• Weather Trade of the month recommendation for either coffee, corn, soybeans, natural gas or one other market
• Detailed information on how global weather may affect commodity prices
• Email Jim Roemer (one question a month) about your market position
• Encompassed crop analysis and special weather maps from around the world
• CLIMATE PREDICT long-range weather forecasts used by major hedge funds and commodity traders
• Grain, Soft and Energy Commodities—Know before the crowd where the weather extremes will be