From Barron's Commodities Corner, Nov. 25:
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.
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
Front natural gas 2.9850.
