Trade War Concerns, La Nina, Solar Cycles And Commodities

Summary

• Cocoa prices finally react to improved west African rainfall.
• Grain prices to remain volatile due to a host of weather and trade war concerns.
• Solar cycles and Plains wheat drought relationships.

Trade War concerns vs. Argentina and Plains drought

While fears of a Trade War with China have had a negative impact on the stock market, along with fears of rising interest rates, a Trump Administration that is completely clueless in my opinion, and a soaring budget deficit, commodities from steel to hogs, cattle, and soybeans have also experienced setbacks. Weather, at times, has taken a back seat to these "trade concerns", but there is a lot of weather to talk about. The Argentina drought created a mid-winter spike in soybean prices (NYSEARCA:SOYB) while renewed fears over the worst Plains wheat drought in decades has caused a spike in wheat prices (NYSEARCA:WEAT) again today.

Probably, one of the top weather markets (which is a bit unorthodox and unknown to most traders) has been in the cattle market. The drought in the Plains is adding to the bearish tone in livestock due to liquidation of beef herds but could have a positive effect a year or so down the road on prices. Why? For more information, please go here.

Cotton prices (NYSEARCA:BAL) that have had a boost due to an increase in global demand will pay close attention to the Texas drought in another few weeks or so.

Cocoa futures (NYSEARCA:NIB) had been the biggest winner of 2018 in commodities, up nearly 40% on worries about hot weather a few months ago. More importantly, improved global demand and hedgers caught short during the onset of the big global crop a few months ago was behind much of this bull move. However, ideal weather this spring may have put a top in the market, at least for now. See here for more information about what is driving cocoa prices? What happens around the Indian Ocean this summer and with the timing of La Nina easing, will dictate global cocoa production over the next 9 months.

There will also be frost in Kansas by this weekend, and if it were not for huge global wheat stocks in good weather for crops in Europe and Russia presently, wheat would be over $6.00.

Cold April weather due in part to La Nina hanging on

SOURCE:STORMVISTA.COM Temps in the teens this weekend in central Kansas may do some damage to wheat on top of the drought

A couple weeks ago, I alerted paying clients about some important rains for the Plains wheat area. These rains helped to spawn a 50-cent break in wheat prices. However, contrary to some other firms out there, La Nina seems to be holding on. It is this combination of continued cool waters in the western Pacific and low sunspot activity, that is not only creating a cool spring for the Midwest and might impact the planting of corn (NYSEARCA:CORN) but threatening.

La Nina still hanging on. In part due to low solar activity and an increase in cosmic and gamma rays, which can act to cool the equatorial Pacific.

What about the Sun?

Our closest star remains an enigma. Every 11 years it produces massive plasma spewing eruptions and this can shower the earth with the so-called "Northern Lights." However, the sun also has a quiet cycle that plays a minor role in global climate. While these max and min solar activity cycles have been recorded consistently for thousands of years, it is the sun's magnetic field that has been less predictable and more inconsistent. However, new research coming out from NASA, Ohio State University, etc. discusses how gamma rays can be attributed to the sun's solar cycles. It has been recently observed that when entering periods of low sunspot activity (fewer storms on the sun and hence, less interruptions to satellite communications, power grids, etc.), that gamma rays increase.

Interestingly, as gamma rays increase (again, during times of low sunspot activity), La Nina events tend to be more pronounced, as there is often net cooling along the equatorial Pacific due to less solar radiation hitting that region. The opposite can occur during solar maximums and a decrease in gamma rays (warming along the equator and more El Nino events).

It was well documented back in the 1970s that droughts in the High Plains could be exacerbated by periods of low sunspot activity. However, this sunspot -drought relationship is not quite as predictable as it once was. This is because a warming planet and a change in hybrids and varieties of corn, soybeans, wheat, sorghum, etc. being grown the last 20-30 years may have thrown off the normal drought cycle, that you see below. Anyone that used the last few solar minimum cycles to forecast really cold winter and/or U.S. grain belt droughts probably had egg on their face. However, this particular spring's cool Midwest weather and continued Plains drought is probably both related to La Nina (that is still hanging on) and the very low sunspot activity (high gamma rays) that we are presently witnessing.

The years of a double sunspot minimum that corresponded very well to droughts in the Plains and parts of the western corn belt (1815-1818; 1842-1847, etc) are shown above. This relationship has not been as consistent a forecast method since the 1970s. Scientists at the University of Lowell, etc. are stepping up their research to try to determine new solar-weather and electromagnetic relationships.

What is the bottom line for grain prices? Volatile in my opinion, with traders having to stay abreast of short-term weather forecasts, not just here in the U.S. but globally.

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.