Grain Prices and Another Arab Spring?
The grain market has settled down the last 4-5 weeks due to a combination of weak exports for corn and soybeans, too many speculators long the market and ideas that South American crops will be huge this winter (Brazil/Argentina summer). In addition, we began forecasting in late August, the drought to begin to slowly ease in the Midwest, in which crop conditions stabilized for soybeans. These rains went a long ways towards the USDA increasing their U.S. soybean crop estimate to 2.86 billion bushels in October, up from 2.63 billion bushels a month earlier; something that we sort of got wind about, during September. Hence, our bias to be short the soybean ETF (SOYB) has resulted in a potential 15-18% profit for investors, the last 4 weeks. While a short covering, post-harvest rally is likely, I see little major upside in both corn and soybean prices this winter and if South American weather improves, prices could head south again, later.
Lower grain prices are necessary to reduce global geopolitical risk. Higher geopolitical risk and the threats of additional "Arab Springs" have concerned many people, since food prices consume increasing amounts of the household budget. This is particularly true in underdeveloped countries-- central banks cannot control this.
Governments use fiscal policy to deal with food issues in other countries. Occasionally, they can act to create food price controls that can worsen food shortages. Some refer to the 2010-2011 Arab spring as similar to the revolution of 1848 that was exacerbated by world droughts, floods and higher food prices. Hungry people are angry people and can bring down governments. While I believe grain prices have already reached their peak last summer, it is too early to predict what political ramifications, might occur in some of the underdeveloped countries.
While global warming could potentially play a role in causing more world woes and global grain panic, currently, we are in between both El Nino and La Nina events and South American crops look strong. Hence, the highs in corn, soybeans and wheat are probably in. It is possible that next summer, corn and soybean prices could be 10-15% less than where they presently are. If so, the fear of another Arab Spring might subside. Nevertheless, grain markets could be a bit oversold, in the short term as demand peaks back up after harvest.
The one concern I have currently is for world wheat crops. The Australia drought (below) has worsened, flooding may aggravate the Argentina wheat crop and parts of Kansas to Nebraska are too dry for proper germination of the winter wheat crop. Wheat prices seasonally go lower into November, but if ample rains/snows do not fall later this fall and winter, wheat prices will not fall out of bed. On the other hand, some improvement in the drought situation should occur heading into late 2012-2013; just from an historical perspective of cycles.
SOURCE: Australian Government of Meteorology
Source: High Plains Climate Center
A Look at Natural gas and Other Commodities Affected by Weather
Natural gas prices have taken a breathier after reaching their highest prices in months last week, due to warmer weather next week. However, I am leaning towards a colder winter this year and given rig counts coming way down (lowest since 1999--though of course shale has increased), $3.00 will probably not be breached to the downside again. Longer term, the ETF (UNG) will probably be a good buy and hold, but the ETF (NAGS) reduces the effect of "contango" and may be a smarter play. However, given large domestic supplies of gas, it would take an extraordinary cold winter to see prices rally 10-20% over the next 2-4 months, something that is possible, but I am not ready to jump on that bandwagon just yet.
(Chart Above) -- A Look at cold and warm years since 1895. This year has been the warmest since 1934. Hence, for this winter's weather, there may be a few similarities in looking at trends from the early-mid 1930's.
Cocoa prices have fallen 12-15% the last 4 weeks from early premature El Nino hyped fears. Historically, global cocoa production can fall anywhere from 2-5% during El Nino, but timely rains have recently fallen. The problem now may be, that it is a bit too wet in spots for the early harvest coming out of West Africa that may put a floor on prices in coming days.
Orange juice prices from $130.00/lb to about $111.00/lb the last 3 weeks as the hurricane season ends on a feeble not and world OJ supplies are plentiful. Timely, follow-up rains will be needed in Sao Paulo Brazil to insure a good early bloom for orange trees. Barring any freeze in Florida this winter and normal to above normal crop in Brazil, prices could fall back below $1.00 later this winter, but may be oversold, for now ahead of the North American winter.
Coffee prices have soured the last 3 weeks after a brief run up to $1.85/lb in late September on ideas dry weather may affect the early bloom, which occurs in October. The weather has also improved in Vietnam, in which their Robusta crop was delayed from wet spring weather. Dry weather now will allow for the harvest to pick up soon. There may still be a few dry concerns in northern Brazil in coming weeks, but not sure it is enough to warrant sharply higher coffee prices at this point. Last year and through the summer of 2012, I was bearish on this market due to a big Brazil crop coming onto the market.
Other pressuring factors in coffee have been large Brazilian producers selling. Also, a negative factor in coffee prices is the backfiring of a government sponsored financing of plans of withholding or purposeful retention of coffee stocks in Brazil to keep prices supported. Finally, certified coffee stocks have been building like crazy and have surpassed the number of straight days of stocks building, surpassing a record from nearly 10 years ago.
So while we mentioned that the ETF (JO) may not fall that much, this is one commodity, which probably does not have a lot of upside potential either in coming months. One way to play the coffee market is too sell a strangle in coffee futures, in which one shorts out of the money calls, as well as puts, until the market breaks out of a trading range, or until I see some major weather development.
Cotton prices have soared in the nearby contract because there are virtually no stocks coming onto the ICE contract. However, once the U.S. harvest progresses, then some pressure in cotton futures may arise again, due to the global surplus. The one concern I see right now with weather is in Argentina where wet weather may limit cotton plantings. We may be in a trading range in this market over the next few months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.