SnowMageddon (U.S. snow drought last winter); historical spring tornadoes; the worst Midwest summer grain drought since the dust bowl days of the 1930s; record ice melt over the Arctic; an historical drought last winter that severely damaged Brazil and Argentina’s soybean and corn crops—are these events all precursors of more wild weather to come?
While we are firm believers in global warming and climate change, sunspots as well as what is happening in the oceans will also have a profound affect on our climate. Such commodities as cocoa, soybeans, corn, wheat, coffee and natural gas will be affected by global weather events the next few months. Below we discuss some of the possible trading opportunities in commodity ETFs based on global weather influences.
El Nino Not Forming, but Solar Activity and Global Ocean Temps Will Impact Our Fall and Winter Weather
The dots you see above represent recent solar storms on the sun that have created incredible northern lights and have disrupted some radio communications around the world. However, the upcoming solar maximum (peak cycle every 11 years of solar activity), is pale in comparison with others of the past. If the sun was even more active than it is now, it may have helped El Nino form this fall/winter, but El Nino will probably not develop.
Photo: Jim Roemer
Ocean temperatures have a huge impact on the world’s weather. First of all (above), #1 shows that warming at the equatorial Pacific has not increased and hence the odds of El Nino forming is lower and is one reason why cocoa prices have been under pressure lately. The warming near Greenland–(#2)could result in a weaker jet stream this winter and result in a much colder October and perhaps early winter. This is because a weaker jet stream will allow for more blocking and allow the jet stream to sag farther south. This could also set the stage for some huge storms along the east coast this winter and in contrast to last winter’s snow drought. Warming off the coast of Southern Brazil–(#3) could result in a much improved soybean and corn crop for southern Brazil and Argentina this winter and have a more bearish impact on grains.
Some Commodity ETFs That Will be Affected by the Weather
With cooler October weather coming and the possibility that this winter will be considerably colder than last year, the Teucrium Natural Gas Fund (NAGS) may be a smart buying opportunity. Already we have seen this ETP rally some 10% the last week on pre-winter hedge fund buying and on ideas that longer term, natural gas production may come down and demand will increase. If you recall, a year ago, we were bearish natural gas on our forecast of a very warm winter. However, natural gas is one of the few commodities that has not staged a rally in recent years and given technical factors and the weather, I doubt we will see December of January natural gas prices back below $3.00 anytime soon. Another great thing about this fund is that this fund was designed to reduce the effects of contango. So it was specifically designed to reduce the cost of rolling an investment when compared with the funds, such as UNG, that hold only a single month.
Several weeks ago, we became more bearish soybeans due to the combination of seasonal factors, improved U.S. harvest weather and crop conditions and too many traders long the market. Historically, following severe U.S. droughts a major fall/winter outlook occurs. I think that longer term, heading into 2013, that soybean prices could break another 10-15% from here if good world crops prevail. While we have already seen the Teucium Soybean Fund (SOYB) drop sharply, longer term, shorting this fund may be a smart play for the next 6-12 months.
Next, wheat prices have soared in recent months brought on by the U.S. summer drought making corn too expensive to feed to livestock, as well as the severe crop problems to Russia this summer. Traders are going to be watching the weather in Australia and the U.S. Plains regions very closely in coming weeks. It is a bit difficult to foster a longer-term perspective in wheat, as there are many countries’ crops to watch and because we are in between an El Nino and La Nina, but here too, there is a chance for a rebound in world wheat production next year and hence shorting the Teucrium Wheat Fund (WEAT) is something to look into, longer term.
Other markets recently trading some weather events have been cocoa and coffee. Cocoa prices rallied from $2200/lb to nearly $2700/lb a few weeks ago, due to civil unrest in the Ivory Coast and unusually dry weather in Ivory Coast and Ghana, which produces nearly 50% of the world’s cocoa. Since then, we have forecast a change in the weather pattern and improved crop prospects, which has helped to pressure the iPath DJ-UBS Cocoa Subindex ETN (NIB) about 10% the last 2 weeks. Historically, cocoa prices go lower through October and since it does not appear that El Nino will fall after all, I do not see a lot of upside potential in cocoa prices at this point.
Finally, we are seeing what we call the Antarctic Oscillation Index (AAO) remain positive. A positive AAO index means that the cold will remain mostly over the South Pole, as we are seeing the ice shields increase over Antarctica. This combined with a very weak El Nino signal at worse, could suggest some dry weather concerns for Brazil coffee regions in October. With wet weather delaying the onset of the Vietnam coffee harvest, this might mean that the iPath Dow Jones-AIG Coffee ETN (JO) has little downside in coming weeks.