See the picture of this guy sliding? Well, he was the “fool” that bought a bullish USDA crop report in grains two weeks ago. I warned of this a few weeks ago about my cautiously bearish attitude in corn and especially soybeans. The stronger dollar, an overbought grain market, technical selling have been in the for a number of commodity markets. Also, a “buy on rumor: sell on fact” situation has been in play.
IN THIS REPORT:
corn and soybeans: Market finally collapses as we expected, “too early”. What’s driving these markets now?
Return of the Conumdrum: Bond and outside markets
La niña Modoki: Stay tuned for updates in the weeks ahead
Low Solar Cycles
Coffee: Market testing key support with drought easing rains coming within 10 days for N. Brazil
Cocoa: After major demand rally, weather is bearish
Wheat Market: Stronger dollar, outside markets and some rains for Canada and N. Plains pressure prices last week
Natural Gas: Will depend on fall and winter weather
Commodity ETFs: Which ones are bullish right now?
CORN & SOYBEANS: SOME IMPORTANT MIDWEST RAINS, BETTER MIDWEST YIELDS REPORTED AND EPA FUEL OIL MANDATE CHANGES CAUSE WASH OUT IN CORN AND BEANS LAST WEEK
THE USDA REPORT (ABOVE) TWO WEEKS AGO WAS A “SUCKER TRAP” AS EVERYONE JUMPED THE BANDWAGON AND WENT LONG. HOWEVER, I MENTIONED SEVERAL TIMES SINCE EARLY AUGUST—THAT THIS WAS LIKELY B.S. AND I HAD NO INTEREST RECOMMENDING BUYING CORN AND SOYBEANS, FOLLOWING VERY VOLATILE SUMMER PRICE ACTION
I mentioned prior to the August USDA crop report two weeks ago that my bias was to “sell rallies in corn and soybeans and to buy puts or sell futures! Well, I thought I was wrong but as it turned out (I am sometime early seeing things), improved western Midwest rains into late August, and the Pro Farmer tour last week showing “better” corn and soybean yield potential than what the USDA suggested, indeed pressured grain prices through support. With all of this talk of drought in the western corn belt, look how the Iowa corn yield is actually much better than last year and above the trend-line.
CONCLUSION for CORN AND SOYBEANS: There has been a volatile back and forth market in corn and soybeans all summer. I stuck to my guns about NOT buying this market and/or selling rallies, especially in soybeans. Key support has been broken on the charts. Some short covering is LIKELY ahead of Monday’s night crop condition report. It may still show some deterioration in crop ratings last week. However, any major bull move in corn and soybeans right now is unlikely unless we have South American weather problems “following” the U.S. harvest.
A. few of you emailed me about the grains and I mentioned selling soybeans last week. Given how volatile this market is, you may have some 30-50 cents profits (about $2,000 a contract) in two days late last week. You may just want to take the profits, otherwise, if we get a decent rally of at least 15-20 cents in soybeans, on potential friendly MONDAY evening crop ratings and some short term concerns that more corn belt rains are needed, my bias would be to sell rallies before or by mid-week.
The corn and especially soybean market will be watching these areas of dryness this week and how much rain falls.
Too late to help the corn crop much, but with harvest pressure around the corner and no frost potential the next few weeks, any major rally of let’s say 30-50 cents in corn and 50 cents to $1.00 in soybeans would only occur AFTER the U.S. grain harvest and especially if there are South American weather problems later this year or in 2022.
A couple of days of short-term big heat in the western Corn and soybean belt early this week and more rains needed in Iowa will probably result in corn and soybeans rallying back a bit early this week after a major sell-off late last week.
Return of the Conundrum
The bond market has another conundrum. Almost 20 years ago, Alan Greenspan admitted that it was a “conundrum” that longer (20-30 yr) bond yields barely rose as he steadily raised short-term rates in his latter years at the Federal Reserve. Now, inflation may or may not prove to be transitory, but it is the highest in decades. Month after month, the official numbers have turned out higher than expected. With higher inflation, investors should in theory demand a higher yield from bonds to compensate for the erosion of buying power. And any suggestion that interest rates are going to go up should, as Greenspan implied, lead to higher long-term yields. Yet they are falling.
The conundrum is most pressing if we look at the yields on Treasury inflation-protected securities, or TIPS, whose ultimate payout at redemption is tied to inflation. People are prepared to buy them for a yield of -1%. The varying paths of core inflation and the 10-year TIPS yield look truly bizarre
- We’ve already reached peak/transitory inflation and the hullaballoo over rising prices is overdone (arguably Chair Powell’s base case).
- We’re at peak growth (although an economy moderating off near double-digit growth is still unusually strong).
- Having benefited from record stock prices, pensions are rebalancing into bonds.
- Relative to low and negative rates in much of the world, U.S. Treasuries remain attractive to non-U.S. investors.
- And investors positioned for rates to rise, not fall—the vast consensus trade—are being forced to unwind positions
(THE INFORMATION ABOVE IS FROM BLOOMBERG NEWS)
LA NIñA MODOKI: A KEY CLIMATIC FEATURE THAT WILL INFLUENCE WEATHER FOR NATURAL GAS, GRAIN, COFFEE AND COCOA PRICES FOR MONTHS TO COME
I will have reports over the next few weeks about La Niña Modoki. My intention is to cover what it may portend for global commodity weather this fall and winter. The historic droughts out west and global heat could offset some of these signals.
The map above is NOT written in stone as warming oceans and historic droughts can throw off models. I will have more updates, again, as we go deeper into the fall and winter.
LOW SOLAR ACTIVITY: CAN IT OFFSET A WARMING PLANET?
In my view and the opinion of NOAA and 90% of all certified climate scientists, the simple answer to this question is NO.
Take a look at the red line of warming global temperatures since 1880. Now, look at the yellow line and how solar activity is less than even in the late 1800s. I think one gets the point.
coffee: BOUNCES OFF KEY SUPPORT ON THE CHARTS but brazil rains coming could mean a more bearish “PSYCHOLOGICAL” trend in prices
CONCLUSION for COFFEE: My apologies for trying to give advice in such a volatile market the last few months. As you know, I was mostly bullish on the ETF JO since last December. In July, traders possibly sold the Dec. $1.80 coffee for put and/or went long the Dec $2.00-$2.50 bull coffee spread, prior to the second Brazil coffee frost a month ago. These positions are losing right now. However, it follows my prior string of 3 or more winning trades throughout the winter and spring, earlier this year. These winners were in futures, options, and ETFs.
It’s important traders “read between the lines” when my confidence is lowered. Last Monday with prices rallying again and just under $1.90 basis December coffee, I advised taking profits and walking away from this market, for those of you that bought futures for a short term trade two weeks ago around $1.77-$1.80. I have low confidence in this market going a lot higher right now given the weaker Brazil Real, outside COVID forces, and some easing in the drought for coffee. Actually, I think the market leans slightly bearish heading into September on the “psychology” of Brazil rains. Follow-up rains are needed from October-December and no question the 2022 crop has been hurt, but I am not sure how much of that is built into prices.
cocoa: IMPROVING WEST AFRICAN WEATHER AND WORRIES ABOUT COVID-19 AND DEMAND PRESSURES PRICES
As mentioned a week ago, I thought this rally in cocoa was not due to the weather. Rather, I attributed it to less cocoa hitting the world market coupled with stronger demand. Talk of dryness in West Africa was overdone. Look how models indeed changed to much wetter for west African cocoa going into late August and early September.
CONCLUSION COCOA: I mentioned last week that if December cocoa prices come back down to the trend-line to short this market. It did early Friday. I am bearish on the weather and would not risk a stop above last week’s high, shown on the charts. What will cocoa prices do deeper into the fall and winter? Stay tuned for my winter forecasts for La Nina Modoki and some ideas.
WHEAT & OATS: STILL HAVE UPSIDE POTENTIAL ON
GLOBAL WEATHER PROBLEMS?
Last week, my Best Weather Spider went from a +2 to +3 in wheat over the last 2 months to a +1 (neutral and unsure). What to do when I express this change in sentiment? Put trailing stops in on a position or get out. Case in Point – “Yes, the Russian drought is worsening and crops in Canada and the N. Plains are in bad shape, but we already had a major rally in wheat on the weather.” I expressed this several times in my reports the last week or so.
CONCLUSION OATS and WHEAT: It is tempting to recommend a buy in wheat on such a nice break in prices last week. However, there are too many outside factors in this market to express high confidence at this point. For most of the summer, I was bullish on MGE spring wheat. I had my spider at a +2 to +3 bullish sentiment. We caught most of this move up the last 2 months. My spider was lowered to a +1 last week (neutral to slightly bullish)
A combination of rains in the forecast for key Canadian and N. Plains growing regions, the US dollar index at 10-month highs, and news that the EPA is looking at lowering fuel blending mandates have taken their toll on the grain markets last week. Still, the drought in Russian wheat areas and wet weather lowering the crop in NW Europe may possibly support this market on breaks.
PLAINS WHEAT AREAS NEED RAIN
Planting for the 2022 U.S. winter wheat crop usually begins in October. Keep in mind that it is a long growing season. Notice the above-normal rainfall in about 10-15 days for much of the western Plains wheat areas.
natural gas: Two bearish EIA numbers and cooler risks create 15% sell off, but warmer risks into September help prices recover again Friday
I’ll remind you of my report from last Wednesday night/Thursday morning. I said, “do not sell natural gas in the hole, rather, sell it possibly on a rally above $3.95.” Prices rallied to $3.98 last Friday on talk of more hot weather coming up and then sold off. The reason for the sell-off was due to demand destruction in the Northeast U.S. from tropical storm Henri. The more medium-term outlook is for less cooling demand as we head into September.
CONCLUSION for NATURAL GAS: For a weather-related major rally in natural gas during the last summer and fall, we need two things. These are a hot September and a cold October to remind people winter is coming. Right now, weather forecast research is mixed. While a La Niña Modoki can suggest a cold early winter, I am very concerned about the fires and historic western drought that may point otherwise.
Stay tuned this fall and winter, as I will have some higher confidence weather trades in the ETF UNG and in futures and options. Right now, following several winning trades in natural gas all summer long again, I am unsure of this market, but would expect prices to rally back a bit given a return to some U.S. heat, following two bearish EIA numbers and off and on brief cooling spells. If you did sell natural gas prices on the rally above $3.95 again Friday, I think I would just book the profit and wait.
WEATHER WEALTH TRADE IDEAS
COMMODITY ETF: the best TO INVEST IN CURRENTLY?
GRAINS: TAKING PROFITS ON SHORT TERM SHORT BEANS BUT UNSURE OF ANY MAJOR RALLY AT THIS POINT IN GRAINS; PROBABLY NOT
Unfortunately, if there was an inverse corn or soybean ETF, I might have suggested it last week when, once again, I became more bearish grains, especially soybeans. I also would like an inverse cocoa ETF, but there is not one. However, selling corn and beans now in the hole is not advised.
My BestWeather spider (go back to my late Wednesday night report last week), went from a bullish +2 in commodities the last few months to a -1 (neutral to bearish). This is due, not only due to the weather changes in Brazil and the western corn belt for more rain, but to the outside markets such as the stronger dollar, seasonal factors, and too big a long position in some of these markets. Crude oil, for example, is in a major bear market it appears.
COTTON: MACRO SITUATION AFFECTING PRICES, BUT WEATHER PROBLEMS ARE POTENTIALLY BULLISH
I see some global weather problems for cotton with flooding in the southern U.S. and dryness in India. However, with such a rally in cotton in the last 6 months, I am not sure if one buys the ETF (BAL) at this point.
SUGAR AND COFFEE: STAY LONG SUGAR BUT PRESERVE PROFITS WITH STOPS; NOT CONFIDENT ABOUT BEING LONG JO OR COFFE
What about sugar (CANE) and the long coffee ETF (JO)?
I have been bullish on sugar futures and the ETF Cane. I am not sure if all of this rain coming to Brazil within a week or two might pressure the sugar market.
Sugar prices this week extended their month-long rally to 3-1/2 year highs on concern about the recent damage to Brazil’s sugar crops from frost and drought. Unica last Tuesday reported that Center-South Brazil 2021/22 sugar production in the second half of July fell -11.8% y/y to 3.034 MMT. Also, Conab on Thursday projected Brazil 2021/22 sugar production would fall -10.5% y/y to 36.9 MMT from 41.3 MMT in 2020/21.
However, my concern for sharply higher sugar prices in the short term is threefold. First, Brazil Real is under pressure again due to Covid concerns. Secondly, lower crude oil prices are sometimes bearish for sugar. Higher crude prices can result in more sugar cane going to Ethanol than sugar production. This can support sugar futures.
Record high ethanol prices in Brazil are also supportive of sugar prices after Brazil ethanol hydrous fuel prices climbed to a record high of 3.1382 reals/liter last Friday. The record-high ethanol prices encourage Brazil’s sugar mills to boost ethanol production at the expense of sugar production.
Thirdly, Brazil’s rainfall over the next couple of weeks (SEE BELOW). While it is too late to help the SUGAR crop presently, if the drought eases deeper into the fall and winter (Brazil summer), this would take the steam out of the bull market. Most of the heaviest rains however appear more in the soybean and coffee areas of Brazil than the sugar cane areas
RAINFALL OF 300-500% OF NORMAL FOR BRAZIL COFFEE AND SOYBEAN AREAS IN ABOUT 8-10 DAYS INTO EARLY SEPTEMBER