The BestWeather Spider Commodity Sentiment

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by Jim Roemer | May 20, 2020

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Highlights:

Mostly beneficial weather for US corn belt with warmer temps and good soil moisture.

Some dryness in Western Europe for wheat, and Russia talking about lower crop production, even in the face of good rains coming.

Short term, it seems Brazilian coffee areas won’t see wet weather that could threaten the harvest. Prices appear to be taking out support, so confidence is lowered about being long short term. Will close out short term long futures position for aggressive traders and book small profits on short July 95 cent coffee put advised nearly 2 months ago.

Natural gas prices rally earlier this week, as the economy opens up slowly. Short term weather has been bearish the last month or so, and demand is not there yet to warrant a major rally

 

Upcoming topics in the weeks ahead:

Historical Midwest summer corn/soybean belt “bull markets” and drought: A look at global ocean temperatures vs today.

The Sun is quiet with no sunspot activity: Contrasting view points of what this may mean, longer term

Global pattern slowly transitioning to a weak La Nina: Implications?

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Natural Gas Prices–Volatile As Heck Following Different Fundamentals

 

Coal is being replaced by natural gas.

The coal industry is in big trouble. This is a good thing in my opinion, due to its negative impact on the environment. Natural gas consumption should increase.

It is very rare for August natural gas to ever be below $2.00 by late June. Some of our research suggests a hotter summer. More than a month ago we recommended selling the August $2.00 natural gas put at 18 cents (a conservative long position. There may be a longer term position long the natural gas ETF (I am thinking about it).

However, without extreme heat in the US in the short term, I am reluctant, yet, to recommend an aggressive long natural gas futures position. While prices of natural gas rallied earlier this week in sympathy with crude oil, traders are bracing for a possible bearish EIA report on Thursday and a lack of near term hot weather demand.

The weather spider has a slightly bearish bias (-1) in natural gas short-term still, but I am recommending the short put position (conservative medium term bullish attitude) for potential hot summer weather, later.

 

 

BestWeather Commodity Market Spider

 

Where I express a value of greater than (+4 very bullish), or (-4 very bearish) this means weather is having a great impact on a particular market and my confidence is high. Where you see a “O”, I am either not following this market presently or unsure of the weather’s impact in this market.

Our spider discusses my market sentiment only as far as the impact weather has on the market. Often other fundamental and technical factors affect the markets, but my spider looks “solely” at the influence (bullish or bearish) the weather might have on a certain commodity.

 

Are There Any Problem Areas To Watch For Grains?

Corn:

It is a bit too wet for Illinois and Indiana, but I do not think it is a major issue for the corn crop at this time. Notice the increased rainfall the last week or so in the NW corn belt on the map, below. This, combined with warmer temperatures the next couple weeks, is just what the doctor ordered for the early development of the corn crop. This remains a bearish aspect to the corn market in my opinion, along with global demand being poor and ethanol plant closures in the United States.

Wheat:

Dryness in Germany and Western Europe is trying to be talked up by some firms for wheat, but I do not think it is a major factor at this time. More good rains are coming for Ukraine wheat and some portions of Kansas.

However, after a stellar sell off in wheat prices the last 2 weeks, fears that Russia may lower their crop (even in the face of rains coming) was probably an excuse for the rally in wheat prices Wednesday. Luckily, our WeatherWealth spreadsheet booked a 25 cent profit last week before this modest price rally.

I am hearing more talk about Russian export restrictions again.

Accumulated precipitation  in Midwest grain areas.

Wheat prices bounced off this trend-line Wednesday inspired by below normal rainfall in Germany and lower crop prospects in Russia

So are wheat price a sell again on this modest rally in prices? Hmmm..I am not sure yet, as there are rumors of Russian cutting off exports again, and I want to evaluate the European and Russian weather situation this weekend. However, with good rains coming to Kansas and Ukraine this next week or so, I do not want to get caught up in the hype of a short-covering rally and get bullish yet.

 

 

 

Weather For Coffee Market Only A Background Factor, For Now

The coffee market is approaching critical key support on the charts. There are still burdensome global supplies. My buy recommendation two months ago in selling puts and most recently buying futures around 105 for aggressive traders, was due to the potential for harvest delays for the Brazil coffee crop and the fact the Brazil Real looked oversold to me.

The weather does NOT (in the short term) look wet for Brazil for the coffee areas but it may be, later.

One area to watch is the Robusta coffee areas of Vietnam. As the maps show below, it has been very dry the last few months. With El Nino transitioning to a weak La Nina, one can see the relationship on my Climate Predict model for below normal July rainfall when Nino34 is negative (cooling). I will discuss more of this in the weeks ahead.

ClimatePredict looking at drought in for Vietnamese coffee.
Percentage of normal rainfall for SE Asia.

Rainfall the last 90 days has been well below normal in Vietnam. This may have an influence, later, in the Robusta market but not necessarily the NY Arabica futures contract. Robusta is “instant” coffee,

There are about 22 days left on the short July 95 cent put advised 2 months ago. While I doubt prices will fall to 95 cents anytime soon, I will recommend booking about 200 points profit ($800/contract) on the short coffee put. My confidence was lowered to a “O” on my weather spider, so, for aggressive traders, I would not let July futures fall below 1.05 if you are long. Otherwise, my spreadsheet will close out the long futures position for now. if July coffee falls below $1.05. I just do not like the market action and Vietnam’s dryness is not a factor yet for the market. (This is a trading market in my opinion and very difficult day to day until there are major weather problems)

Coffee prices so far this year.

July coffee

 

West African Cocoa Weather–Mixed Signals

A few of you have been asking me about the cocoa market and the long ETF (NIB). I cannot say with great certainty that we are looking at a bull market in cocoa. There are many factors with respect to seasonality, demand, weather, etc. A week or so ago, the spreadsheet (below) took about $1000 profits on long positions. However, I cannot see cocoa prices falling sharply right now, due to bullish seasonal factors and some minor dryness in West Africa.

There are some dry pockets in West Africa right now. However, historically for there to be major summer weather problems, oceans temperatures in the Gulf of Guinea need to be cooler than normal.

Ivory Coast cocoa farmers.

The worst droughts and greatest summer bull markets in cocoa occur when the Tropical South Atlantic Ocean temperatures (TSA) is cool (negative). This happened in 1983 and was also a severe drought for the Midwest grain market. You can see below how the TSA is warmer than normal.

There is a strong seasonal to be long cocoa as we head into June, but I would prefer to see more global weather problems to get real bullish. Nevertheless, with a few dry weather issues this past winter in Ghana, I do not see the market falling out of bed for the moment.

If I see in a week or so it drying out and staying that way, then I may recommend a buy in cocoa due to seasonal factors. Otherwise, the grain market has much more weather in it right now than cocoa.

Ocean temps and years with weakest summer rainfall in relation to coffee areas.

If ocean temperatures (above) near west Africa were cool, as they were in 1983 and other years, I would have much higher confidence calling for production problems for cocoa in west Africa this summer.

 

WeatherWealth Spreadsheet

Open positions are still long natural gas by being short the August $2.00 put and short Dec. corn. Recent closed positions were in short wheat last week and long cocoa.

The spreadsheet next week will show us closing any long position in July coffee if we hit 105, which is likely and taking a small profit on Thursday on the short July 95 cent put you see where it says “open trade position.” (I want to be nimble right now).

by Jim Roemer | Apr 30, 2020

The report below discusses some of the fundamentals and weather affecting some global commodities and our overall viewpoints. Towards the bottom of the report is our WeatherWealth spreadsheet.

Wheat–Burdensome global supplies and critical European/Ukraine rains offset lower US crop ratings

I’d have been more aggressive in a sell recommendation last week if wheat crop ratings hadn’t fallen for Kansas and Oklahoma. The crop fell again this past week because of more frost damage. See an article here.

However, in all honesty, it is wheat (bearish), and maybe a little bit corn (slightly bearish) that are the main weather markets right now. Cotton is beginning to reach to the upside due to wet weather in the southern US delaying planting, but also due to ideas of reopening the US economy. Weather could become a bullish factor in coffee in about a week or so with the first cold snap in southern Brazil and some very wet weather.

Big time rains are coming to Europe and Russia and were very key in wheat prices selling off again. Despite the US wheat crop ratings due to the freeze two weeks ago, the world still has ample global supplies.

Also, rains will be hitting northern Kansas this Saturday night and then most of southern Kansas next Tuesday.

Rains hiting US Plains and better rains in Australia, Europe & Ukraine break wheat prices

Rains hitting parts of the Plains next week, combined with important rains for Australia, Europe and Ukraine, are breaking wheat prices.

Buying July KC wheat and selling July CBOT wheat often works this time of the year. (This is not on our WeatherWealth trade table.) Unfortunately, on the Russian export restriction ban BS chatter 9 days ago, CBOT July wheat was trading above $5.50. Now it is approaching $5.00 on improved global weather.

Wheat trades are impacted by Russian export chatter
wheat damage from freezes

Frost damage in Oklahoma last week.
Winter wheat condition by percent

Wheat crop ratings fell in the US again this week, otherwise I would have recommended a strong sell in futures.

Corn—-Wet eastern corn belt weather for planting not enough to offset other global bearish fundamentals

The collapse in crude oil and hence closure of more ethanol plants continues to haunt this market. A year ago, there was major flooding in Iowa, Nebraska and the Dakotas. It resulted in millions of acres being lost and a late spring rally in corn futures.

Look how much wetter it was a year ago in May in the northern and western corn belt than it is today. With warmer weather in store for rapid planting from Illinois to Iowa, Nebraska and the Dakotas, only a hot dry summer or a very wet May that produces flooding like a year ago will get this market out of the doldrums.

Dryness for the second Brazil Safhina corn crop is NOT a major market mover. The drought easing rains coming to Ukraine are more important for now.

Corn Moisture Index

Look how wet it was a year ago, delaying corn planting.

Crop Moisture Index April 25 2020

This year the main wet weather is in the central and eastern corn belt and especially the Deep South (rice and cotton).

Unless we see major flooding next month and lower US crop ratings, the odds of any major rally in corn prices is unlikely.

Cocoa–COVID 19 and good Ivory Coast crop pressures market, but Ghana crop may be hit by weather problems.

I added a buy recommendation on the Weather Wealth spreadsheet. Some of you have asked me about the conservative long cocoa ETN (NIB). I have to be honest in saying that here, as well, there are too many uncertainties regarding COVID-19 and its impact on global cocoa consumption. The world’s largest cocoa producing country is Ivory Coast. It is NOT yet severely dry enough there to warrant anything more than a long position for conservative traders.

Cocoa may be a bit oversold. Traders may have bought July futures on Monday around the $2,330 area. If global recovery comes sooner, and if Ghana’s weather worsens in coming weeks, then July cocoa could possibly challenge $2,500-$,2600. I would not let the market get below 2260.

I will have a detailed cocoa weather report sometime next week.

Natural Gas—Prices rally on potential opening of US economy and lower shale production

I put out my first buy recommendation in a long time by recommending selling August $2.00 puts on Monday morning. Natural gas prices soared off their lows. The early-in-the-week rally was not because of the weather. Instead, it was due to longer term implications of potential shut-downs in shale production, brought on by low crude prices.

At the same time, making this market confusing short term: nat-gas on Wednesday and early this Thursday was sharply lower on concern that nat-gas production may not fall by enough to offset the plunge in demand from the coronavirus pandemic. The Gas Exporting Countries Forum, a group of 20 gas-exporting countries that constitute 61% of global LNG exports, said today that it doesn’t intend to cut output to restore nat-gas prices. The Forum stated that it “…commits to provide security of supply for our long-term customers and guarantee pipeline gas and LNG supplies in critical times when the market is desperately looking for natural gas.”

It is possible natural gas prices could sell off again due to recent bearish EIA numbers.

My summer forecast is a potential hot one in some key regions. If so, then August natural gas would not close below $1.80-$2.00, but that is a long way off. I am friendly natural gas medium term into summer on breaks. But the weather in itself right now is not a bullish aspect to the market yet, with limited demand though May.

If we had a major present sustained heat wave with 100 degree temps, I would have been more aggressive recommending a buy of futures. However, I feel confident that traders who sold the August puts could still make at least $1000-$1500 a contract come June or July.

The triple long natural gas ETF (UGAZ) is near historical lows and may be a good medium term buy on breaks heading into summer.

Coffee–Trying to digest a million different factors. Weather could become friendly to this market

The Brazil Real collapse and worries over demand due to COVID-19 have pressured prices again. It may turn wet in Brazil prior to or during the harvest and that may impact production. However, right now, weather is not a key factor.

In about a week, you can see the potential heavy rain in Brazil coffee areas (300-500%). If this were to persist throughout May and June, this could “potentially” compromise the crop. Hence, I recommended a month or so ago to sell the July 95 cent coffee put with a potential profit of about 300 points or $1000 a contract. I also think a cold snap may excite the market in about a week or so, though I do not see a freeze yet.

Rains will be heavy for Brazil coffee

Heavy rains coming to Brazil coffee after May 5th. This may cause a bit of short term concern, but NOT on the rumor (like in the grain market) but the actual fact of heavy rains.

Below is our WeatherWealth table of commodity trade ideas since last December. Remember, past performance is not necessarily indicative of future results, and there is substantial risk of loss in trading futures, options and ETFs.

Natural Gas, Cocoa commodity trades

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