Extreme weather creates bull market for commodities

The past few weeks have been exceptional for the commodity markets. Tensions between Russia and Ukraine have impacted several commodities. In addition, global (post-Covid) tightening continues to drive inflationary waves across many markets. The tight supply of commodities, from crude oil (USO) to aluminum, tin, coffee (JO), cotton (BALB) and soybeans (SOYB), are nearing multi-year highs. This may come as a surprise given the rising dollar (flight to safety).

In particular, the coldest January in years has helped the natural gas market (BOIL) to soar: around 30% in less than a week - unbelievable.

Here's an interview I did earlier this week in which I predicted the extreme cold more than three weeks ago, and there will be a lot more to come in February.

The historic January price development for natural gas: more cold on the way As LNG exports to Europe and Asia surge again and Russian tensions stoke fears of a disruption in natural gas supplies to Europe, many energy traders were caught off guard by the late winter's extreme cold. It's rare for natural gas prices to rise this much in January, but now there is a risk that Texas wells will freeze later this week and that the East Pacific Oscillations Index (EPO) remains deeply negative; a heat block north of Alaska showing no signs of weakening.

I mentioned the analog for 2014 in my Weather Wealth newsletter, in which ocean temperatures and a La Nina would likely mean a reversal of the record-breakingly warm December and lower natural gas prices we've been witnessing to consistently cold weather in late winter. The standard computer models that many other meteorologists use completely failed and were wrong a few weeks ago. For example, look at this map (below). The European model predicted a warm (red) December through mid-February two to three weeks ago for much of the eastern half of the country! This couldn't be further from the truth, and that's why it's important to challenge computer models.

Even in Florida it has gotten so cold that iguanas have been falling from the trees.

South American crops face another catastrophe Another market that has exploded with the weather is soybeans. Brazil and Argentina account for nearly 50% of world soybean production, and La Nina has taken its toll. South American soybean production will fall by at least 10-15 MMT from original estimates due to La Nina-type drought. Below you can see that production in much of southern and central Brazil is being impacted by the above-average drought. Although it rained in some key areas about a week ago, the extreme heat of over 100 degrees is once again taking its toll on the crop.

South America is, of course, a vast region with crops stretching thousands of miles. Trying to monitor every little meteorological nuance isn't always easy. But I have sources all over the world who keep me up to date on the state of the crops. For example, here is a picture of some of the northern soybean areas that are too wet to harvest.

The potential first bull market for cocoa in several years Where else do I observe weather-related problems with crops? For the first time in several years, potential problems for the cocoa harvest could arise in West Africa. Usually, during the La Nina period, global weather conditions are ideal for cocoa production. However, an unusually strong mid-winter harmattan wind is causing dry weather problems in Ghana and Ivory Coast. In addition, the ongoing La Nina-type rains could affect the cocoa harvest in Indonesia (NIB).

We can see the strong dusty winds starting to cause some drought problems in West Africa.

Conclusion: Each weather dependent commodity behaves a little differently than the weather and harvesting input. For example, corn and soybean prices often react to current crop conditions, but more so to weather forecasts that go about a week into the future. Natural gas prices react in the same way, but are also dependent on EIA reports, LNG exports, political tensions, etc. In the case of cocoa, the market often reacts not to short-term weather forecasts but to longer-term production concerns and whether drought will extend crop cycles beyond 6- 10 months will affect.

As I have been advising my clients in my various newsletters for weeks, building a diversified portfolio in ETFs such as (BOIL), (CORN), Crude Oil, Cotton and others is a must given the possible rate hike by the Fed and the uncertainty surrounding tensions between Russia and of Ukraine makes the most sense.