Grain Prices Collapse Should Continue With Ideal August Weather

Includes: CORN, SOYB
by: James Roemer

Our longer-term view about the grain market and near ideal summer weather for U.S. corn and soybean crops is coming to fruition and based on numerous studies we did 2-8 months ago with regards to ocean temperatures, global historical cycles following back to back droughts, etc.

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The yellow, warm blocks you see south of Greenland and near Alaska are a perfect set up for the big Midwestern and Eastern heat to break in coming weeks, as we suggested the last week or two. These blocks tend to enhance the development of cool surface high-pressure systems that models are sometimes unable to see, more than a few days in advance.

It has been famine to feast (drought to floods) and then back to drought in Iowa, Missouri and Eastern Nebraska the last month or so, but major blocks of warm air aloft in Canada and near Alaska (see map) will set the stage for an entirely different late summer, than we have seen the last 2 years. While I have been unable (due to legal and client obligations) to make specific week to week recommendations in many markets, I will tell you that given my longer range outlook, the ETF SOYB may have seen the highs this week with a potential 5-10% move down over the next 4-6 weeks. Everyone that has read my past reports can read between the lines that "most ag commodities" would maintain their summer downtrend, due to good global weather (India and China too), combined with the stronger U.S. dollar.

Any sudden change in the U.S. weather, or if Iowa, Nebraska, Missouri and central Illinois do not get good rains the next week or two, would send soybean prices soaring. But right now, I don't see that happening.

I have been basically bearish corn since last summer's hysteria ended in the fall and we forecasted record Brazil production last winter and for the U.S. drought to break. Still CORN has another 5%-8% down or more in coming weeks if ideal U.S. weather remains. The cooler weather is just what the 'weather doctor' ordered for a bin-busting U.S. corn crop this summer. In addition, near perfect weather in the Ukraine and China will not help the export picture either.

Our forecast for a major pattern change towards cooler weather is right on track and may continue for most of the month of August. The EPO index (Eastern Pacific Oscillation) will remain in mostly a negative phase, unlike the dust-bowl years of the 1930's, and certainly unlike the weather pattern the last two summers that resulted in record high grain prices, crippled some global economies and was even an impetus for the 'Arab Spring.'

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Two teleconnections, which helped us second guess models for calling for a continuation of drought in the western corn belt and heat for natural gas regions in the Midwest and East, are the EPO and AO index. Teleconnections are MUCH more useful at forecasting more than 1-2 weeks out, than looking at computer models, which most forecast firms depend too much on. BOTTOM LINE -- A negative EPO and negative AO index, have resulted in blocks in the higher latitudes that will increase rain amounts as cooler Midwest weather collides with a hot ridge in the SW. This hot ridge has been enhanced by weak La Nina conditions that we see continuing.

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.