Global Grain Panic: Trading Opportunities For This Record Hot Summer And Historic Drought

Includes: CF, CORN, JJA, SOYB, UNG
by: James Roemer

What is Causing this Historic Summer Drought?

First of all, while there have been dozens of profitable trading opportunities these last few weeks due to the Midwest drought, I also have to express my sympathies to millions of Midwest and Plain States grain farmers and ranchers.

Click to enlarge.

The drought (red) across many Midwestern and Plain States, not only threatens corn and soybean crops, but may impact fall planting for wheat if rains do not arrive by October. In addition for the second consecutive year, ranchers in Texas to Kansas will be battling an ominous situation of record grain prices and an inability to feed livestock effectively. This could put the nation's livestock industry on its ear, but spur higher demand for other products.

Source: High Plains Climate Center

While there are many factors causing this summer's drought. Some of the most important criteria have to do with thinning Sea Ice over the arctic. This lowers the temperature difference between the Gulf Stream and the northern latitudes and results in greater "blocking pattern"--in which weather patterns stay bottled up and do not change. Global warming, increased solar flares and the brush fires over Colorado are also contributing factors, in my opinion.


Sea Ice Changes -- The low Sea Ice is changing the ocean currents around Alaska and the Arctic and helping to feed this summer's drought.

Source: NOAA

Benefiting from this Summer's drought. Which Commodities or Stock Industries to trade

This summer's drought shows all signs of lasting into August. If one goes back and looks at history, many of the worst droughts ever (1936, 1955, 1980, 1983, 1988) last a minimum of 8 weeks. This would take us into at least early August.

We have already seen corn prices rally 50% on this drought and soybean prices 45% since the South American drought last January expanded and now in the U.S.

The ETF (Down Jones-Agi Agriculture Total Return--ETN (NYSEARCA:JJA) has rallied some 25% since the end of June and a further rise in price can be expected as well as in the ETF-Teucrium (NYSEARCA:CORN). It is the soybean ETF (NYSEARCA:SOYB) that could lead the way over the next 3-5 weeks, though it is a little late to get in now, I still expect higher prices.

While corn prices may still have another 5-8% upside, I am a bit worried that the government will act to restrict Ethanol usage (at some point). Hence, though corn may still rally, we have had a decent move and it may be time to take some profits.

Source: Google Finance.

Why Soybeans may lead all agricultural commodities into August

Corn prices have soared as we forecast, but it is the soybean market that still has significant explosive upside potential in coming weeks, if this U.S. drought persists through August. Why?

1) South American drought last winter has shrunk world soybean supplies to dangerous levels

2) Indian Monsoon faltering in western areas means oilseeds, groundnuts and some soybeans are suffering

3) U.S. soybean yields could fall to as low as 30-32 bu/acre with near record heat and dryness across the Midwest and South. This could continue to create a world panic that the U.S (the world for that matter), may run out of soybeans.

4) River levels along the Mississippi are running dangerously low. This threatens the export market for now as it tightens the pipeline further. But could be a bearish factor later, once the "bull" weather market ends.

Water levels (above) are getting to the minimum stage necessary for transporting many goods along the southern Mississippi.

Source: NOAA

So what might happen down the road if soybeans climb to unprecedented levels of $18-$20/bushel? One has to consider that the U.S. might employ a 1971 Nixon-type or 1980-81 Carter-type embargo to certain countries in order to ease the world supply fear. If this were to happen, soybean prices could come crashing down. So the best way to play soybean futures is by being long futures and long puts against it or having a bull spread on (long Nov soybeans, short next July or Nov 2013) in which by next summer, soybean prices could fall dramatically as world supply fears ease. For the next few weeks, however, a major squeeze in prices may still occur. However, given such fear in the market place and the fact prices have rallied so much already, unless you already have been on this soybean train ride for a while, it may make sense just to sit back and look into other investment alternatives.

More Big Summer Heat----Which Sectors of the Economy Would be Affected?

Without going into too much detail, consistent with our advice more than a month ago, certain beverage companies (especially beer companies) due well during summer heat waves. Fertilizer companies also benefit, such as CF Industries (NYSE:CF), while the poultry industry suffers when corn prices go too high. Take Tyson Foods (NYSE:TSN) as one example; its price has fallen some 20% since late June as the drought has intensified. By this winter and probably 2013, I expect a rebound in world corn stocks brought on by improved crops in South American and the U.S. next year. Hence, when corn prices peak (within the next month or so), TSN would be a buy. Look into some "cool weather" clothes companies, and google some articles such as this.

How about natural gas stocks? They have been beaten down for years, but this summer's heat wave is slowly eating into stocks and prices have reached $3.00 like we suggested. Mutual Funds such as Fidelity's Select Natural Gas (MUTF:FSNGX) is probably a safe way to play the potential longer term rise in prices, as opposed to (NYSEARCA:UNG). The charts are looking better for FBR Gas Utility Index Investor (MUTF:GASFX). The hot weather has helped this company break resistance with a modest 5% rise since this heat and drought began.

The U.S. is Not the Only Country Having Weather issues

I am not going to list the dozens, if not hundreds of investment opportunities from this drought, but if this summer's crazy weather - and for that matter, the entire year's - does not put some Global Warming deniers to rest, nothing will. This year's weather only proves what a multi-trillion dollar effect "weather" has on the global economy. Last winter Argentina/Brazilian soybean and corn farmers got socked, and now, it is not just the U.S., but western India faces a possible multi-billion loss as well to sugar cane, cotton and oilseeds.

The Indian drought, if it continues, may be another "thorn in the rose" for gold bulls looking for another run up in prices later this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.