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Weather Extremes Abound For Australia, Midwest Grain Belt And West Africa Cocoa

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Includes: BAL, CORN, JO, NIB, SOYB, WEAT
by: James Roemer
Summary

Slowest US corn harvest pace since 2009 with frosts and wet weather on the way.

West African cocoa seeing wettest fall on record that may compromise the recent crop.

A detailed look at the Australian economy and commodities.

The Australian economy has been booming and is seeing a "bull market" cycle ever greater than in the US. Australia has entered its 28th year of consecutive annual economic growth, setting a new record among developed economies for uninterrupted expansion. This enviable record of steady growth proves the robustness of Australia’s economy and its reliability as a low-risk and safe environment in which to do business.

Other than being a hot country by many standards, did you know that there are more kangaroos in Australia than people? There are also three times as many sheep as humans in the country. 25% of Australia’s residents were born overseas. A large part of Australia is desert and 90% of the population live on the coast.

Even this Koala bear seems happy about prospering in the Australian economic boom.

Much of this boom can be attributed to strict monetary policies, positive trade relationships with its global partners. In addition, the country’s strong regulatory institutions, ability to respond to global changes, and diversified, services-based economy underpin its steady growth. In addition, the Australian dollar continues to decrease helping its export markets.

Australia and Commodities

According to the Australian government, with annual exports of $195 billion+, Australia is the 14th largest export economy in the world, but much higher than this when it comes to commodity exports. The heavy dependence on commodities served Australia well in the early 2000s because prices were booming. Remember the peak in oil, and gold at $1,900 an ounce? The boom helped the Australian economy grow aggressively, and its stock market performed relatively well during this period.

Australia exports commodities like coal, iron ore, gold, cotton, meat, wool, alumina, and wheat primarily to trading partners in Asia. China accounts for a whopping 36% of Australian exports, and Japan takes another 18%, government data shows. Australia is the world's leading exporter of iron ore by some margin, enjoying a 58% share of the global $66.6 billion market, with their nearest rival, Brazil, being responsible for 20% of that annual export total. The vast majority of Australia’s iron ore exports head to China, which accounts for 84% of the country’s exports. Australia is the sixth-largest exporter of gold in the world and has a 4.1% share of an annual export market that is worth $324.6 billion. The United Kingdom (39%) and Hong Kong (35%) are key destinations for Australia’s gold exports, followed by China which receives 15% of the country’s annual output. The annual global wheat export market is worth $36.3 billion and Australia is the fourth-largest exporter with a 9.9% market share. Australia is the fourth-largest exporter of copper ore in the world and enjoys a 7.5% share of an annual market worth $44.2 billion, with Chile (28%), Peru (19%) and Indonesia (7.9%) the leading trio of copper ore exporters. China imports 35% of Australia’s annual copper ore exports and the second-largest destination is Japan (12%). Australia is the leading exporter of coal briquettes with a 40% share of an annual export market worth $67.7 billion. Japan (32%), China (21%) and India (17%) are the top importers of coal briquettes from Australia. Coal is mined in every state of Australia but the bulk of the production is focused on New South Wales, Queensland, and Victoria, with 75% of the coal mined being exported.

The likelihood of a 3rd consecutive year of Australian drought could affect not only the wheat market, but potentially cotton and even iron ore and copper exports.

Source: Agriculture.gov.au

Did you know? One of Australia’s more unusual exports is the supply of camels to Saudi Arabia.

One in a 120-year Australian Drought will threaten some commodities

Source of map: NOAA/VeggieStar

With all of this optimistic talk about Australia, the third consecutive year of drought promises to undermine some of their commodities in the months ahead. The reasons for this present historical drought can be found here.

Source of Map: Jim Roemer in house Climatech weather forecast program

The Indian dipole (above) has been the most positive in history. This has to do with cool waters over Indonesia that could result in a more serious drought, not only over Australia but also Indonesia. This could have some serious implications for the exports of nickel, iron ore, cotton and wheat in the months ahead. The yellow arrows on the chart above show dry risks in red. Currently, the coffee ETF (JO) has been under pressure from good rainfall recently in the southern and central regions of Brazil. But you can see that later on, some weather problems may develop. To see how I alerted some clients to a short-term change in the Brazil coffee outlook a week or so ago, please go here.

But drought is nothing new in Australia. From 1895 to 1903, it resulted in enormous sheep and cattle losses – as much as 50 per cent - across the country. It also had a snowball effect on land settlement and the economy. To this day, it's still regarded as one of the worst in Australian history.

In recent memory, the millennium drought - between 2001 and 2009 - devastated communities across the south east and south west of the country. The decade-long drought contributed to widespread crop failures, livestock losses, dust storms, and bushfires. It also brought changes to Australia’s water management systems.

What makes the current drought a standout is the temperature. The last 12 months have seen record-high daily temperatures reached around the nation. This tells me that climate change, not just El Nino and the Indian Dipole, is mainly responsible for the current drought situation.

Any commodities to trade in based on the Australian Drought?

Presently, the big weather extremes I see are in the US corn and soybean market, in which a potential wet, cool October will already worsen the situation for the harvest. Due to the wet spring, corn (CORN) and soybean (SOYB) corn and soybean yields are the lowest since about 2012-2013. In addition, near-historical wet weather for West Africa poses potential threats to the huge cocoa (NIB) crop that is supposed to be harvested the next few months.

With respect to Australia, the drought is beginning to affect the wheat market (WEAT) and cotton (BAL) could be soon to follow. Trade war concerns aside, the possibility of a lower US and Indian cotton crop, combined with potentially a second poor Australian cotton crop in a row, could help cotton prices rally in the months ahead.

In summary, the combination of incredibly low solar activity, climate change, a potential rebound in El Nino next year, and the record positive Indian Dipole could help many agricultural commodities recover as we head deeper into 2019 and especially 2020 as weather problems become more severe, not just in Australia. Buying a diversified basket of agricultural commodities could well pay off in the months ahead, following what has been a general depression in prices for the last few years due to weak global demand and huge crops. Finally, if this Aussie drought worsens, then exports of commodities such as iron ore and copper could be adversely affected due to low river levels brought on by drought.

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.