What Impact is the Weather Having on Commodity Prices?
Weather is having an impact on several commodities. For example, after natural gas prices challenged new highs recently, it appears that the first part of December will be much warmer than normal and could keep natural gas futures prices from climbing above $4.00. Trying to develop a longer-term weather forecast for the North American winter is much more difficult than in recent years. This is because of the drought over the Plains, near record warm Atlantic Ocean temperatures, and cool waters near the Gulf of Alaska. Right now, the weather forecast for natural gas is NOT bullish!
Upcoming warmth will be especially true in the Midwest and Plains, in which drought conditions will continue to aggravate our nation's wheat crop. Soybean and corn traders are following some upcoming wet Argentina weather forecasts. Planting delays could affect some Argentina crops. Corn and soybean prices had a major Fall sell-off based on good early South American weather, improved U.S. soybean prospects, and too many speculators being long the market. Now, the market could have a bit of a bounce due to global demand and weather problems in Argentina. The map below shows a warming trend at the top of the atmosphere over the South Pole which could result in a wet December Argentina weather pattern. This wet pattern could keep soybean prices firm in coming weeks, even though I painted a more bearish medium-term picture in soybeans last September. If southern Brazil misses the rain the next 2 weeks, then soybean prices would be off to the races. Presently, I expect that most dry areas in Brazil will see timely rains.
This Argentina wet pattern may lower crop prospects a bit for wheat and cotton as well. I think cotton prices may be close to a bottom, particularly if eastern Australia continues drier than normal and the Texas drought does not break by spring. Yes, world supplies of cotton are ample and China demand is always key to this market, but I do not believe, given some world weather issues, that cotton will go much below 70 cents again.
Coffee prices continue to take it on the chin due to a much improved rainfall pattern for Brazil, the fact farmers have too much to sell from last year, combined with worries over much lower demand from European. I don't see much upside in coffee prices, though the market could be over-sold in the short-term
For cocoa, there are some firms out there touting an increased world cocoa deficit and earlier weather issues in West Africa. However, for right now, I see generally good weather for the developing mid crop in West Africa, and the odds of a severe Harmattan Wind this winter is probably less than 25%. It has been a bit dry in Ghana and there may be a few crop issues, but I look for increased rainfall in most of West Africa due to cold weather coming to Europe and a block near Greenland. To get a real bull market in cocoa we would need to see larger world production issues and a rebound in the European economy as Europe accounts for over 35% of global chocolate demand.
Finally, the world is awash in crude oil and barring any major economic turnaround or legitimate military threat, crude prices could stay under pressure this winter. The one lone potentially bullish argument I see in the crude sector from the weather is the colder than normal December weather pattern for central and western Europe. Time to get your ski boots on and head to the Alps as abundant snows will fall over the next couple weeks. The cold European weather may have some effect in widening the European gas oil versus U.S. heating oil spreads
"The red you see on the chart above, represents intense warming aloft, some 25-50 miles at the top of the Atmosphere over the South Pole. The result is what we call a negative AAO index (Antarctic Oscillation Index) that sends cold fronts north through Argentina, resulting in wet weather".
After Hurricane Sandy, the Main Weather Story is the U.S. Plains Drought
Many economists and investment advisers continue to analyze what the residual effects of hurricane Sandy might be to our overall economy. In the midst of the recent meteorological chaos in the eastern U.S., in which New Jersey alone saw a $25+ billion economic calamity, a potential forgotten section of the United States might be the U.S. Plains. At least 8 western states still have moderate to severe drought conditions that continue to threaten the U.S. wheat crop. Pastures for cattle are fried and there are ominously low river levels that could paralyze commerce along the Missouri River and great Mississippi.
Wheat prices are holding support and traders will be paying very close attention to weather forecasts for Kansas, Nebraska, Oklahoma and Texas. Over 50% of the country is back in at least modest drought conditions again, with the main wheat growing areas in severe shape. If El Nino does not form, the chances may be greater for spring weather problems next year. This could possibly mean that wheat prices and the wheat ETF (WEAT) has another 10-20% or more upside in coming months. It is also a bit too wet in Argentina for the wheat crop."
High grain prices affect consumers as well as dairy farmers, fertilizing companies, and a host of other businesses. While corn and soybean prices have fallen some 15% or so from their summertime highs and conditions look generally good in South America (other than some wet weather that may cause planting delays in Argentina and a few scattered areas of dryness in southern Brazil), it is the U.S. wheat crop that has potentially the most risk for crop damage this winter.
The historic summer drought of 2012 probably had a negative effect on the U.S. economy growing a bit less than forecasted last quarter.
In order for Oklahoma, Nebraska, and Arkansas to come out of their drought, more than a foot of rain is needed. In many areas of the Plains this is the worst cycle of dryness since the 1954-56 period and the dust-bowl days of the mid 1930's. From a cyclical standpoint, it would not be impossible to say that this drought could last for more than one year. If so, the costs for agricultural equipment and fertilizers could soar.
By the way, for an interesting retrospective of the history of American agriculture and the Dust Bowl I suggest watching this PBS video.
"The merciless drought continues to scorch many western states. In almost every state west of the Mississippi, drought may linger through winter and could have a multi-billion $ adverse economic effect on the economy if it lasts through next spring"