A brutal cold snap in December is likely, according to some forecasters, and it could lift winter wheat prices higher than $5 a bushel, up more than a dollar from recent prices. A rally would aid the much-beleaguered farm economy, which has been hurt by steadily falling wheat prices since mid-2012.
Investors wishing to wager on such a move should buy March-dated futures contracts for Kansas City Hard Red Winter Wheat on the CME. Alternatively, they can purchase stocks of companies that benefit from higher crop prices, such as fertilizer makers Mosaic (ticker: MOS) and Agrium (AGU). Historically, plant-food prices have been positively correlated with grains’ prices.
What is likely to precipitate a wheat rally is crop damage, due to cold and dry weather in some key growing areas. Here’s how:
Winter in the Northern Hemisphere is expected to be harsh. Next month “is setting up for one of the coldest Decembers in the U.S. ever seen,” predicts a recent report from Shawn Hackett, of Hackett Financial Advisors and author of the Hackett Money Flow Agricultural Report newsletter.
He says that two weather systems will be responsible: “a near-record negative” (meaning cold) western Pacific oscillation, which will likely combine with a developing negative North Atlantic oscillation. These weather systems have a history of going through negative and positive phases that result in cold or warmer weather.Front natural gas 2.9850.
Hackett isn’t the only one forecasting a tough winter. “It should be much colder in all of the wheat-growing areas in the Northern Hemisphere this year than it was in the last two,” says Joe D’Aleo, chief meteorologist for agriculture at Weatherbell Analytics in New York. Ideally, winter wheat is planted and starts growing before cold weather induces the seedlings to go dormant. “Then what you want is snow to protect it from the deep freeze,” says D’Aleo. Snow forms a protective insulating layer over the ground, so the plants aren’t damaged.
This year, however, the presence of a La Niña weather system makes that unlikely. A La Niña forms in the equatorial Pacific off South America, affecting weather worldwide and bringing with it cool, dry air. (This weather phenomenon alternates with the better-known, hot-wet El Niño system.) La Niña’s dryness creates the problem because snow cannot form without moisture—hence, no insulation for the dormant wheat crop.
The key areas to watch are southwestern Kansas, Oklahoma, northern Texas, and eastern Colorado, notes D’Aleo, as they typically get lower snowfall than normal in a La Niña year. Brutal cold and the lack of moisture could combine to damage their winter wheat crop.
AT THE SAME TIME, the market looks primed for a rally from another source....MORE