Drought To Ease In Argentina And What Climate Indices Mean For Commodities

Includes: CORN, SOYB, UHN, UNG
by: James Roemer

At least 3 Storms next 2-3 weeks for the Midwest, Deep South and East, while drought eases in Argentina soybean areas.What Indicies are Controlling the Weather?

We are in a weather situation of incredibly volatility the next 2-3 weeks, and perhaps longer that will bring about an easing in the drought conditions in Argentina and offer Midwest and Plains farmers, some hope that drought conditions may ease, at least temporarily.

The weather pattern is one in which we will witness at least 3 more storm systems from coast to coast, making for some volatile price action in the energy market. This has also been one impetus for grain prices to sell off recently and in the face of weaker demand for corn.

We have three climatic events that will control the U.S. and European weather pattern. One of these events is called the Pacific Northern Atlantic Index (PNA). When this index is negative, low pressure and colder air tends to affect the west with great snows for Colorado to Utah ski areas, and warming in the southeast and eastern U.S. This index also suggests some improved moisture for parts of drought stricken Kansas, Nebraska and Iowa in the weeks ahead.

We have two cold signals that will complicate any hopes of a warm eastern U.S. weather pattern, in which our friend the "ground hog' was probably wrong predicting an early end of winter, this year. These two signals are the Northern Atlantic Oscillation Index (NYSE:NAO) and the Arctic Oscillation Index (AO). When these indices are negative, warm blocks over Greenland and the Arctic circle set up, helping to force cold air south into Canada and often the United States. When cold signals clash with warm ones, the results are often extreme weather.

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Longer Term Implications of a -PNA/-AO/-NAO to Commodity Markets

We have seen the soybean market break about 5% over the last 5 days, in part due to our forecast last week of drought easing rains for southern Brazil and Argentina the next few weeks. Rains are absolutely crucial to crops in South American the next 3-5 weeks. Longer term, I think the odds are better than 60% that over the next 4-6 months, the ETFS (NYSEARCA:SOYB) could break 10% from current levels, unless we have a summer U.S. drought. The one concern I have is the slow pace of the soybean harvest in Northern Brazil, in which rains could further aggravate the situation. This will need to be watched.

When looking at historical trends of these three indices, the 1954-1956 U.S. drought cycle years do pop up. If weather trends were to mimic this time period, then a major rally in wheat, corn and soybeans would occur this spring or summer. However, the year 1964 might be a better fit, in which rains and snows were plentiful over Kansas to Iowa and Nebraska during the late winter and spring. Given the present weather situation, a slight dent in the U.S. drought will occur over the next month or so. While it is a long growing season and trading corn and wheat futures this early in the season is very unusual, weak demand and forecasts of good moisture has kept corn futures and the Teucrium Corn ETF (NYSEARCA:CORN) under pressure.

The -PNA/-AO/-NAO combination will continue to affect heating oil, gasoline and natural gas trading, right into spring. Typically, gasoline futures rallies this time of the year as traders anticipate increased driving demand ahead and heating oil sells off. However, with a return of some off and on cold weather and snows, there will be plenty of short term trading opportunities the next few weeks, in which heating oil and the ETF (NYSEARCA:UHN) has a chance to rally. I also still believe that off and on snowstorms and occasional bouts of cold weather, heading into March should keep the ETF (NYSEARCA:UNG) from falling much further.

The cold weather coming up for Florida has created a bit of excitement in the Orange juice market. Recently, we recommended buying OJ futures, not due to Florida cold (its a bit to late to hurt the crop now and I do not see devastating frost), but because of disease concerns.

Finally, after stellar Chinese demand and ideas of lower production in the southern Hemisphere for cotton, and worries over reduced 2013 world acreage, the cotton market has topped out for now. Due to drought easing rains in the deep south and the possibility that grain prices will go lower, this could mean that world cotton acreage will not fall as much as earlier anticipated. Hence, we recommended a couple weeks ago to consider taking profits on long cotton positions and the ETF DOW Jones--UBS Cotton Total Return Sub-Index ETN (BAL)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.