IN THIS REPORT:
Historical drought has continued in Brazil. A look at rainfall table (click on it)
The situation for Brazil coffee crop is dire and helped prices soar last week
How a positive AAO index warm Atlantic and La NiÑa may influence Brazil coffee and sugar cane weather
Midwest grain harvest weather and what is influencing prices?
Reason behind my more bullish outlook in cotton a few weeks ago
Wheat prices soar on more of a reduction in world stocks
Is the rally in cocoa weather related?
WILD NATURAL GAS MARKET. WHAT IS GOING ON?
Hurricane Sam and climate implications?
Another stock in the green revolution
Weather Wealth (bottom of page)–Two new option trade ideas in natural gas and coffee
HIstoric Drought in Brazil has continued to affect our breakfast table
From sugar to your morning cup of coffee and orange juice Brazil is the #1 country in the world that feeds our breakfast table. The weather in the next few months will be critical to whether these commodity prices keep rising or not.
Rainfall in September was well below normal in the coffee areas again. This is one main reason for the explosion in coffee prices again last week. Deforestation and climate change can still impact global coffee production. I am sticking with my forecast for improved Brazil weather the next month or two beginning in about a week.
SUGAR AND ORANGE JUICE
The Brazil Real, Indian and Thailand sugar exports have been bearish sugar vs the growing drought in Brazil coffee. What happens with rainfall in São Paulo will affect sugar and orange juice prices in the months ahead.
BRAZIL RAINFALL LAST 4 MONTHS FOR COFFEE, SUGAR, AND ORANGE AREAS (CLICK ON THIS CHART TO EXPAND)
The situation for Brazil coffee crop is dire
SOURCE OF PICTURES
You can click on the full table above these images. However, this is a closer glimpse of the May-September total rainfall for key coffee areas in Brazil. The star shows the cumulative rainfall. Take a look at the Minas Gerais and Espirito (Robusta coffee area) rainfall. This year has been the lowest since the 2011-2012 La Niña.
It is critical that these rains forecasted (wet maps below) Sao Paulo and Minas Gerias verify soon. If not, coffee prices will go to $2.20 in a heartbeat and sugar prices may rally as well. But again, sugar has headwinds with big crops in India and Thailand (see Weather Wealth trade ideas, always at bottom of my reports)
RAINFALL PROJECTIONS DEEPER INTO OCTOBER. SO FAR, MODELS HAVE BEEN TOO WET FOR BRAZIL COFFEE AND SUGAR. THIS IS ONE REASON FOR THE RALLY IN THESE COMMODITIES LAST WEEK.
VIETNAM WEATHER UPDATE
Robusta coffee prices have been soaring for months. Part of this has been because of logistical issues due to transportation problems and tight stocks. Weather will be important for the Vietnam harvest in the next month or so. Some recent heavy rains and more coming may cause some quality or harvest issues.
I will have to look at this more closely next week. I do not know if this will be a market factor. My focus is on way too many other markets.
Rainfall could be above normal the next month or so in parts of Vietnam’s coffee areas. Indonesia has had tremendous rains and some flooding. If the drought continues in the northern Brazil coffee areas, this would have much more of a bullish impact on Robusta (from a weather standpoint) deeper into October and November. However, again some improvement in the Brazil situation should occur in a week or so.
LA NIÑA, POSITIVE ANTARCTIC OSCILLATION INDEX AND A WARM ATLANTIC-RAINFALL IMPLICATIONS?
The Antarctic Oscillation Index (AAO) will be going positive. This means a major cold vortex remaining over the South Pole. This combined with La Niña tends to bring some wetter signals to Brazil coffee and sugar. This is not always the case. However, when the tropical Atlantic is warmer than normal, this increases the chance for improved rainfall for drought-stricken areas. Such is the case, perhaps, through November.
Let me put things into perspective. It is quite simple, if the drought continues for Brazil coffee and sugar cane throughout October-December it would be almost definitely because of deforestation and Climate Change and not La Niña. This would definitely give even more credence to how a changing climate is affecting global crops and commodities. Notice the potential dry risks for Argentina corn and soybeans in a month or two. This could result in a bull market again in corn and soybeans after the U.S. harvest.
Midwest grain harvest weather & what is influencing prices
The soybean market collapsed last week on harvest pressure and another USDA crop report. Given the dryness for Argentina, a wetter outlook in the western and northern corn belt may eventually gain market support. However, South American weather will not become a major factor for another month or so.
Spring wheat continues to see strength from expectations Canada will continue to decrease the size of its crop (due to drought). Expectations that USDA’s Small Grains Summary and Quarterly Grain Stocks (which came out Thursday) would be friendly wheat also supported the market.
Minneapolis wheat saw support from a report from Stats Canada will continue to revise their spring wheat production estimate downward, as drought conditions in Canada were slightly worse than expected. The same reduction is expected for canola as well. China has been aggressively buying Australian wheat, despite the fact that the two countries are in a barley trade dispute. The wheat is going into the feed ration, replacing corn. To some degree, it is slightly lowering the need for soybean meal due to the higher protein wheat. Russia’s wheat price increased again this week for the 11th week in a row, The price increase has resulted in a decrease in exports of 22% since the start of the new marketing year versus last year.
the reasons for my recent bullish bias in cotton futures
High cotton prices are shaking up futures market. This ignited a short squeeze in the New York cotton contract. It also signals higher costs for makers of T-shirts and other apparel.
The higher price raises clothing production costs. Retailers may try to pass this on to consumers. Shipping constraints are also helping cotton rally.
China has been buying more American supplies in recent weeks and the “raw-fiber equivalence of cotton” estimated to be contained in U.S. apparel imports has been occurring at the highest rate since the 2010-11 price spike.
All of these factors are contributing to yet another commodity that is influencing the rate of inflation. Inflation could remain higher than what the Fed is reporting and predicting. Take a look at what TIPS have done over the last year or so. Certainly, it has been a much better investment than leaving one’s money in cash.
The latest USDA cotton estimates for 2021/22 (August-July) indicate that global ending stocks are projected at 86.7 million bales, 5 percent (4.6 million bales) below 2020/21. This season’s stock decrease is largely attributable to declining supplies in China—where stocks are projected to fall by 4.3 million bales. Stocks are forecast at their lowest in 3 years, as world cotton mill use exceeds production for the second consecutive year in 2021/22.
Normally, as the table above reveals, global ending cotton stocks this tight would mean prices in the 80-90 cent area, not over $1.00 now. However, China’s cotton lint prices have hit the highest level in years. (See Weather Wealth trade ideas at bottom of page)
WHEAT PRICES SOAR ON TIGHTER STOCKS, LOWER PRODUCTION AND DRY WEATHER FOR PLANTING IN RUSSIA
U.S. Sept. 1 supplies of wheat fell to their lowest level since 2007 following the smallest harvest in 19 years, the government said last Thursday. If you recall, I recommended about three weeks ago, rebuying the wheat ETF (WEAT) or selling December put options. Part of this was due to seasonal factors, as well as higher prices and the potential for La Niña dryness for crops deeper into 2022. However, I also said that I was unsure if improved planting weather in parts of the Plains from rainfall would prevent a major rally.
U.S. farmers produced 1.646 billion bushels of wheat in 2021, down from 1.826 billion a year ago, according to the U.S. Agriculture Department’s small grains summary report. Domestic wheat stocks on Sept. 1 stood at 1.780 billion bushels, USDA said in its quarterly stocks report.
Latest estimates point to global ending stocks of wheat falling for a second year in 2021-22, while to the lowest level in five years, measured against the primary vertical axis. Stocks as a percentage of use is reported at 35.5% (black line to the right) and is the lowest in six years, while the percentage of global stocks held by major exporters (green line) has fallen to 18%, both measured against the secondary vertical axis. That is what is driving the wheat market more than current weather, for now.
In addition, a significant drop in Canada’s 2021 production estimate of 7.5 million metric tons and a further 12.5-MMT drop in the estimate for Russia’s 2021 production, also contributed to the price rally. These two countries represent two of the top global exporters.
Dry Weather may be affecting planting (red area) in eastern Ukraine and western Russia
Crop conditions look good in Australia (blue) with more rains on the way
IS THE RALLY IN COCOA WEATHER RELATED?
The short answer to this is no. The charts look bullish and stronger demand has helped this market. There is also talk of lower supplies out of Ghana as the trees may have been stressed by such a big crop a year ago.
I missed this entire move up in cocoa, with no real high confidence recommendations, because we are not in a weather market.
La Nina usually bodes well for global cocoa production, though Indonesia flooding could lower their crop slightly. If there are strong Harmattan winds this winter, that could be a game-changer from a production standpoint. However, soil moisture is generally good in most areas right now.
Wild natural gas market. what is going on?
Yes, if the above statement is true and the U.S. has a cold early winter, natural gas prices could easily go to $7-$ and possibly $12 if the entire winter is cold. Why?
A) Supplies of natural gas in Europe and Asia are the tightest in years and LNG exports from the U.S. are soaring;
B) The hot U.S. summer and historical drought out west has cut into U.S. natural stocks;
C) We have a squeeze situation with limited supplies and hedgers and producers panicking
While I caught part of the move up in natural gas prices in June and July, I have been reluctant to make any real high confidence recommendation the last few weeks. The volatility is just too high and the weather forecast is a bit confusing. Yes, prices spiked to over $6.50 a week ago, but again, if October and November are warmer than normal in the U.S., this is usually NOT a bullish situation for prices. Hence, we are seeing prices all over the place right now. I DO NOT want to recommend a buy-in natural gas with my forecast of potentially a warm October extending into November. If I see legitimate cold U.S. weather that will remain, that will be different. Yes, the charts and other fundamentals are bullish
A JIM ROEMER WEATHER WEIRDO—HURRICANE TRECKING TOWARDS GREENLAND. IMPLICATIONS?
Guess what folks? One of the last times we saw an October hurricane trek towards Greenland (It will be just an extratropical system by then), was back in 2010.
That year also had a Russian spring wheat drought (like this year) and a Brazilian coffee drought that eased a bit by November. IF this analog is correct, then expect higher winter and or spring-summer grain prices on global weather problems, possibly a top in coffee prices, and a winter rally in natural gas, later.
MORE GREEN ENERGY IDEAS: JKS SOLAR
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GRAINS: bigger stocks and harvest pressure hit soybeans, but wheat continues to soar
As you all know, I did not get caught up in the mid-summer bull move in corn and soybeans on the western corn belt drought and bullish August USDA crop report. In fact, I had said to buy puts or sell calls, about two months ago. The only grains I was bullish on were oats and spring wheat. Recently, I put out a buy recommendation in wheat again about three weeks ago Wheat prices have soared about 50-75 cents (7-10%). I would use trailing stops in both long wheat, the ETF (WEAT) to preserve profits, and also if you are long oats, a trailing stop as well.
Oat and spring wheat have had the most bullish stocks situation due to global weather problems and seasonally prices go higher into October, per my comments 1-2 months ago.
SOFT COMMODITIES: improving south american rains through october make me wary of being too bullish up here
I am sticking my neck here and making a trade recommendation to sell the December $2.20 call option in coffee. It would be a lot nice trying to make 20-40 cents on a trade or about $7,000-$12,000 a contract. This trade would only make about $2,000-$2,500 if we close below $2.20 by later November. Remember, that would still pay for about a year of my services.
Yes, this may be risky and there is no question that the situation is dire in Brazil and prices could scream higher on any new reports of damage. But given my forecast of some important rains for Brazil coffee through November potentially and the high intrinsic value of options, I am recommending this trade and exit the long ETF JO if one is still long for this position. I would love to see coffee prices go to $2.50 or higher. Perhaps deforestation and Climate Change will bring drier weather again later on. If it does, I will recommend a buy again, but not right now.
Everything is asking me about sugar prices. I am not sure. There are too many factors. The sugar charts look great, technically. I just do not know in a week or two whether some sell-off will occur once it starts raining in Brazil. In addition, I do not see any help from the Brazil Real. Just do not let prices get below what I discussed in my report above.
Sugar prices are consolidating modestly below their recent 4-1/2 year nearest-futures highs. The downside for sugar prices in the near term appears limited on concerns about the recent damage to Brazil’s sugar crops from frost and drought. The International Sugar Organization (ISO) on Aug 27 raised its global 2021/22 sugar deficit estimate to -3.83 MMT from a May estimate of -2.65 MMT after frost in July damaged Brazil’s sugar crops. I just do not know how much of this is in the market.
In orange juice, I was bullish on the Brazil drought and COVID-19 (health reasons) demand back in May. A lack of hurricanes in Florida and rains coming to Sao Paulo next week make me unsure about this market. Again, one or two showers of rain are not enough to help the situation but if it stays consistently wet, later, then I am not sure OJ prices can get back above $1.50 without a major Florida winter freeze.
Cotton has had some global weather problems and stellar China demand. A week ago, mentioned that prices might rally above $1.05. They did in a heartbeat. My BestWeather spider has been bullish for the last month. Given we have already rallied above $1.05, and the weather is only a partial factor, I would raise stops to $1.00 to preserve any profits you might have if you are long
NATURAL GAS: many bullish fundamentals but a warm, u.s. fall should keep prices below $7 for now
Given such high premium and volatility and potential bearish late fall weather, I am going to recommend selling the way out of the money December $8.00 call option. As of this writing and natural gas prices higher on Monday, I believe this option is trading at about 60 cents or so ($6,000 a contract).
The first sign of any cold weather this market would soar given such tight stocks and LNG exports. Europe and Asia are in a critical situation. So we may look to recommend lifting this trade later, but there is enough time value and rich, juicy premium to do this.