The EPO Index - Key For Natural Gas And Grain Trading This Summer

Summary

• Spring wheat still has a drought, but farmer hedge fund selling hits the market.
• Grain and natural gas trading will be based on the EPO.
• What is the EPO Index?.

It is rare that I write back to back reports within a few days, let alone a month on Seeking Alpha, but I wanted to share with those trading natural gas and grains, why a potentially negative EPO index could mean the highs are in grains; at least for a while.

I alerted paying customers "only", yesterday, to what I believe will be a major shift in the U.S. weather pattern, before models began showing this late Wednesday and on Thursday morning. A full description of the EPO and all other teleconnections that affect global weather, thousands of miles away can be found here.

Map above--Stormvista EPO

While drought conditions still affect a large part of the far NW corn (CORN) and spring wheat belts, this negative EPO (above) represents blocking over Alaska. The result? Often cool fronts sagging further south into the heart of the Midwest. It is rare to see Midwest droughts last through August if the EPO remains negative. Almost every major grain belt drought (1936, 1956, 1983, 1988, 2012 and others) did not have warm blocking over Alaska.

Natural gas prices (UNG) have had a little lift of late, in part due to extreme Midwest and southern heat expected over the next week or so. Some of this will make it into the Eastern U.S. The question is, will it last? Without the EPO index going positive, it is possible that our hot summer forecast may be tempered a bit. A lot to digest, you bet.

What about Wheat Prices?

Wheat (WEAT) prices were on a tear until recently because of the following factors. The drought in the Northern Plains spring wheat belt; the lowest U.S. wheat acreage in years and a smaller crop hitting the market, plus worries over a lower crop in Europe and potentially Australia. When global weather disasters hit (which is not often), this can create massive short covering. Traders and hedgers that were short wheat for years on huge global supplies---ran for the fences. The question becomes, can wheat prices rally back, following the recent 10% break off the highs the last two weeks?

Below is a brief study we did regarding global wheat yields. It is interesting to note the last two times, global wheat yields were above trend-line for six consecutive years!! This would make one think that my goodness, after five big global wheat crops in a row, it should happen for a sixth time again this year? Not so fast. A statistician would laugh. The Earth is 3.5 billion years old! Surely two six year record global wheat cycles are meaningless when considering the annals of human history. Weather problems may exist for Australia and other countries this year, but the problem is for now, the world is still awash in wheat.

If a short history is a judge, then this should be the third cycle, of six consecutive above normal global wheat yields. However, statistically, this is really not enough data to make that sort of call. Wheat is now below key support levels and the massive early summer rally in spring wheat is being adversely affected by hedge selling from farmers, trying to lock in good prices.

While it is possible that problems in Australia and other countries will help wheat prices bounce eventually, given the supply demand situation, the last time we had a drought in the N. Plains and a similar supply demand situation, wheat prices did not reach much above $4.50. This is a concern to bulls.

Analyst’s Disclosure: I/we 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.