Seeking Alpha
Hedge fund analyst, commodities, natural resources
Profile| Send Message|
( followers)  

The grain market took it on the chin this week, do to a combination of Chinese corn and soybean cancellations, weak overall exports and generally ideal South American weather. We have advised for weeks that corn and soybean prices would likely not see a rally and have been mostly in the bearish camp, because of our feeling that too many traders were long the market and from competition from South America. It is possible that in coming weeks, soybean prices could fall below $13 if ideal South American weather remains through February.

While the drought in the Plains wheat area continues, Russia has announced they will raise their export target. This combined with some snows in Nebraska, Kansas and Texas and generally good European and Russian snow cover has kept this market from rallying. I do not see a great deal of upside potential in wheat unless we see the drought expand this spring (more on this down the road)

Currently, about 25% of the Brazilian soybean growing areas are too dry and there have been planting delays in Argentina, but I do not think this is enough to warrant much concern from the trade in corn and soyeans.

What I am more concerned about is the developing dryness over Minas Gerias that may be affecting the budding of some trees. After a major 50% sell off in coffee prices the last year or so, we are getting to the point that coffee prices may begin to rally if timely rains do not fall soon. This market may be oversold.


(Click to enlarge)

The red line shown above represents rainfall in northern Brazil, compared to normal and last year (yellow). You can see most coffee areas have been running dry lately that may begin to cause some concerns for the crop and the coffee market.

Source: FAS

We have been bearish natural gas on the warm December weather and expectations of mostly bearish EIA's. The ETF UNG has taken it on the chin. However, due to warming over Greenland and the Arctic and given the increase snows I see over the Midwest and parts of the east in coming weeks, natural gas prices will likely not fall below $3.00 for the rest of the winter. Hence, looking to sell natural gas put options or perhaps take a light long position may be warranted, but I don not expect a major move up at this point, of more than perhaps 10% or so.

I continue to feel cotton prices will be well supported due to concerns about the Australian crop and potential lower world acreage next year.

Cocoa prices continue to drift lower due to improving weather conditions in West Africa and I see few signs of any winter problems in Ivory Coast or Ghana. The one concern I see is in Bahia, Brazil and Indonesia from dry weather. These two countries account for about 15% of the world production of cocoa, but I am not sure if it is enough to stop the bleeding in this market.

Source: Forecast: Weather And Commodities