Trading in the weather of El Niño

April 17, 2016 04:00 PM
Trading in the weather of El Niño

Trading in the weather of El Niño

The grain markets remain one of the few commodity sectors still experiencing a contraction in volatility. The downward trend has been steady, unrelenting and a textbook version of El Niño’s typical, “buy the rumor, sell the fact” trading pattern. This has allowed large speculators to profitably pile into the short side of the trade. Their profitability could end abruptly as grain users begin to lock in the future processing margins and weather patterns shift towards a more harmful La Niña effect late in the summer. This could help offset the exceptionally large global inventory currently capping potential rallies.

The current wheat crop has an overhang of supply causing many analysts to cut their global forecasts for spring wheat planting. Domestically, hard red winter wheat plantings are down about 9%. Winter wheat makes up the bulk of the U.S. crop. Most of this crop lies in the heart of El Niño’s domestic impact. Too much moisture through the Great Plains combined with a potentially cooler spring could have serious effects on wheat in the ground. This is beginning to show up in the COT report as commercial long hedgers have been locking in their forward usage needs at a record pace. The net position in Kansas City wheat is the largest on record and Chicago wheat is near record levels as well. A reversal higher or short covering could push KC wheat back near $6 per bushel.

The moisture damaging the winter wheat crop could be a boon for corn and soybeans. Corn is first in the ground and we expect another very large crop. Input costs have continued to decline, incentivizing farmers to plant corn over beans. However, American farmers are being hurt by dollar strength and increasing global competition. December ’16 corn futures may not be able to defend support at $3.74. A fall through there could increase end users’ profit margins and lead to significant contraction. 

Soybeans look weak heading into 2016 because of a tremendous inventory backlog. Typically, we see commercial long hedgers like soybean crushers buying this time of year to lock in prices on the last of the old crop and start buying new crop ahead of spring volatility. However, the commercial trader action has already come in on the sell side, as soybean farmers already are concerned about year-end pricing. Anecdotal evidence suggests there could be large stocks of beans still sitting in the bins, un-marketed. Their selling should flush out the bottom-picking small speculator position, forcing beans through the $8.50 low set last September.

Looking out toward the growing season, there remains one wild card yet to play. Historically, there is a positive correlation between the strength of an El Niño fall/winter event followed by a summer/fall La Niña event. El Niño generally means warm and wet in the United States. La Niña generally means cool and dry. No surprise that this year’s record-breaking event has led to the National Oceanic and Atmospheric Administration’s (NOAA) current expectations of a La Niña occurrence at 50% and trending higher for September/October. This could impact yields and help bring the corn and soybean markets back into balance after consecutively large surpluses.

About the Author

Andy Waldock, owner of the brokerage firm Commodity & Derivative Advisors and the subscription service, is a third generation commodity trader with over 25 years of experience on all of the main U.S. exchanges. Andy stays abreast of modern programming developments due to the trading programs he employs for his own account and managed money.  He can be reached at