Commodity Markets On The Skids As World Climate Normalizes

by: James Roemer

World Climate More Tame does not bode well for most Agricultural Commodities.


Coffee prices broke resistance briefly last week, only for the ETF (NYSEARCA:JO) to fall back 6% again. There is a great deal of "mixed" fundamental news for this market. On one hand, we have some of the worst fungus related disease issues in Central America in history that could lower coffee production some 10% (the market knows this), while on the other hand Brazil still has a huge crop to harvest and weather looks mostly favorable. The return of decent rains for Vietnam and lack of El Nino signals probably bodes well for their crop. But what about the chances for Brazil to see a winter freeze (our summer)? Earlier research anticipated cold weather scares in June or July, but the maps below don't suggest this. To have a legitimate freeze scare or frost (1953, 1975, 1979, 1981, 1994, 2000). Temperatures some 70,000 feet or higher over the South Pole usually have to be warm. This in turn can force cold air to penetrate further north (remember it is South America) into the heart of the Brazil coffee belt. As you can see, the map to the right represents the historical warm temps (red) 2-6 weeks ahead of most frosts. To the left, the forecast for late May, 2013 is for a cooling stratosphere and hence, no legitimate freeze threat for now. As a result, the ETF will be volatile and difficult to predict in coming weeks, while grain prices will be much more sensitive to weather conditions. Without a freeze in the next 8 weeks, coffee prices might be doomed by the huge Brazilian crop. Being long some coffee call options just in case is freezes, is a low risk trade, but current climatic conditions don't suggest this happening.

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The grain market has taken it on the chin again, pressured by relatively large projected world stocks this year and the potential that the U.S. corn crop could help swell given the drought has eased in coming weeks. This is something (the drought breaking in the corn belt), that we discussed and forecasted months ago, due to the cyclical nature of weather and changing ocean temperatures in the eastern Pacific.

Planting of corn has been some of the slowest in recent memory. Only the years 1984, 1993 and 1995 were slower in the modern era. So why have corn prices stayed under pressure? Part of the reason has to do with better farm machinery and technology and farmers are planting like crazy this week. Some warmer Midwest weather has arrived and while both 1993 and 1995 had a major late spring and summer rally on further planting and germination delays, my forecast for summer stands for relatively benign weather. There is some concern that the SOI index (a barometer if La Nina or El Nino may form) has gone positive and could result in a hot summer and drought conditions to expand north again. However, record May cold in Alaska, 103 degree temperatures at Sioux City, Iowa earlier this week, a record high temperature at St. Louis and April ranking as the wettest since 1895 in the corn belt all suggest a normal to cool Midwest summer this year.

I look for the ETF (NYSEARCA:CORN) to drop another 10% or more come mid July unless a prolonged wet pattern disrupts crops, such as in 1993 and 1995 or the drought comes back into the corn belt. Anything in between this is going to keep corn prices from rallying very far.

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However, don't tell farmers in SW Kansas to Texas the drought is over. Many of them continue to struggle with the third year in a row of drought that is decimating their wheat crop and may threaten cattle herds again. So why then has wheat and the ETF (NYSEARCA:WEAT) fallen some 7% the last few weeks? After all the Russian wheat crop has now seen more than a month of sustained dry weather that could lower yields a bit from their stellar earlier potential. The main reason is due to the comfortable world stocks situation.

There is some suggestion that the NAO index may go negative later on. If this happens, then the situation could get worse for the Russian wheat crop and put a floor in prices, but corn prices have little chance to rally sharply unless the U.S. weather pattern changes.

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Rains are needed in Australia and Russia in the next few weeks, otherwise the wheat market could explode. Even though the SW U.S. plains has a drought, most other crop growing areas are improving and world stocks right now are ample without major consumer or end user panic.

Natural gas prices have fallen faster and quicker than we expected due to the most recent bearish EIA numbers and the typical seasonal lull in spring heating and cooling demand. Given the relative price of natural gas versus 5 year average stocks level, prices should be over $4.20 in July futures, especially with the whole summer ahead of us. We also have some extreme heat coming up for Texas and a lot of meteorologists forecasting an active hurricane season. Nevertheless, after my bullish late winter and early spring attitude on very cold weather and a modest depletion of natural gas stocks, I am reluctant to call for anything more than a short term rally in (NYSEARCA:UNG) due to the potential of a normal to cool summer and continued shale production.

Sugar prices continue to trend lower due to huge Brazilian production and excellent harvest weather the last 2 months.

Cocoa prices are taking a breathier because of seasonal bearish late May factors and my forecast of a potential trend-line or above trend-line 2013 world cocoa crop. I do not see the ETF (NYSEARCA:NIB) rallying a lot more, unless my forecast is wrong for the summer, or we see a tremendous increase in European grindings, civil unrest in West Africa, etc.

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I put together a very quick tutorial (above) of how ocean temperatures around the world influence world cocoa production. Cooling oceans also exist to the west of Peru along the equator. This, combined with warm ocean waters around Africa "should mean" normal to above normal cocoa production this year.


Finally, we mentioned selling the gold ETF (NYSEARCA:GLD) again, several weeks ago. Prices have taken another beating due too many analysts pumping up this metal for months (if not years). The easy money was made back 2-5 years ago when world panic gripped global financial markets. Now, with the stock market rallying (money going into equities), the dollar a bit stronger and a host of other fundamental and technical chart considerations, the odds of seeing gold prices anywhere close to $1700 anytime soon is wishful thinking--it won't happen.

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. Because of responsibilities and contractual arrangements with clients, our report will be sent no more than 1-2 times per month.

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