Keep Tropical Softs On Notice; Indian Monsoon Season is Weak

The delayed monsoon season could have tremendous consequences for tropical commodities, particularly those grown in India, such as cotton and sugar, as we saw beginning in 2009. Although these particular commodities are mired in bear trends, El Niño-related weather events can quickly flip the script.

That’s why I’d like to Share this great update on the Indian Monsoon season from Andrew Turner, lecturer in Monsoon Seasons at University of Reading (UK). Enjoy!

India is missing its monsoon, and El Niño could be the culprit

By Andrew Turner, University of Reading

With each monsoon season India waits with bated breath for forecasts from the India Meteorological Department and other international forecasting agencies. This year’s forecast suggested a weakened monsoon, and sure enough for five weeks the monsoon has failed to provide the deluge that is expected.

For India, the monsoon rains typically last from June to September and contribute a whopping 80% of the annual rainfall total. Indian society is therefore finely tuned to the monsoon for its agriculture, industry and water supply for drinking and sanitation. If spread evenly over the whole country, the total rainfall during summer amounts to around 850mm. This year has seen substantial deficit so far, currently standing at about 37% below normal and close to the large deficit in experienced in 2009, which was, like 2002 before it, a year of substantial drought, bringing reduced crop yields and hitting the country’s whole economy.

Now in mid-July, the forecast looks set to improve. The monsoons’ advance northwards across the country has been particularly slow, leading to lack of water for agriculture and prolonged heatwave conditions – in Delhi a week or so ago I experienced temperatures near 40°C due to the absence of rain. In some regions, farmers have had to plant alternative crops that require less water due to the lack of rain, and authorities have diverted irrigation to drinking water, exacerbating their problems.

Anatomy of the monsoon

The monsoons are the biggest manifestation of the effects of the annual seasonal cycle on the planet’s weather. During spring and summer, the difference between the rapid warming of the Earth’s surface and the slower warming of the nearby ocean generates a tropospheric temperature gradient – a strong gradient in air temperature from north to south of the equator, seen in South Asia most strongly over northern India and the Tibetan Plateau. This temperature gradient stretches far up into the atmosphere forming a difference in pressure, stretching from high pressure over the southern Indian Ocean to low pressure over India. The result of this pressure gradient is the seasonal winds we know as the monsoon, which carry moisture to supply the monsoon rains across Asia.

The onset of the monsoon rains typically comes at the beginning of June, with the weather front stretching from the southwest Indian state of Kerala across the ocean to cover the states in the far northeast of India. For Indian society, and especially farmers, knowing about any variation in the intensity and duration of the monsoon and when it will start is vital. The progression of the monsoon across the country normally takes around six weeks, reaching the border of India and Pakistan by around mid-July. In September, the monsoon withdraws in the opposite direction, and as a result northwest regions experience a much shorter monsoon season and consequently greater pressure on water resources.

Change is coming

So why has it been happening? While a full study won’t be carried out until after the season, it is likely that it relates to El Niño – a warming of the central-to-east Pacific Ocean along the equator that happens every few years, changing seasonal weather patterns in many parts of the world but particularly around Indian and Pacific Ocean regions.

For India, El Niño is generally associated with monsoon drought. The remote interaction with the monsoon (known as teleconnection) is caused by a disruption to the normal trade winds in the Pacific and Indian Oceans, known as the Walker Circulation after Sir Gilbert Walker, a British meteorologist in India who sought to predict when the monsoon would fail.

Rising air and enhanced rainfall meet over the warm ocean surface during El Niño, much further east than Indonesia as is usual. But what goes up must come down, and these shifts in the circulation lead to descending air over India, which reduces the strength of the monsoon. Research has also established that El Niño can delay the monsoon’s onset, shortening the duration of rains over India.

A major concern is that the monsoon will be changed by global warming. However, all the indications from our climate models are that the Indian monsoon will continue to supply the region with strong seasonal rainfall. In fact most suggest that greater concentrations of atmospheric carbon dioxide will bring more, rather than less, rain. So far, so good – but the monsoon’s rains are not a statistical average spread equally on each day and in each location. Model simulations also suggest that tropical rainfall will tend to be heavier when it occurs, with potentially longer dry periods between rain events. Both of these factors have important implications for water resources, including crop damage as well as increased flooding.

With El Niño conditions forecast to grow in the Pacific throughout the rest of 2014, the full impact on this summer’s monsoon will depend on if the forecast comes true and the location of where El Niño occurs. What we can’t yet say with any certainty is how El Niño’s link to and effect on the monsoon will change under warmer future climate conditions – we only know that greater extremes of variability are likely, and a more variable monsoon may be a problem.

Andrew Turner receives funding from the UK Natural Environment Research Council and the India Ministry of Earth Sciences. This article was originally published on The Conversation.

Read the original article.

Where I’ve Been

It has been months, January 29 to be exact, since I last updated this blog. It’s time to explain where I’ve been and what I’ve been up to. Originally, when I accepted a new position at R/West Marketing, I planned to update this blog once a week. That has not happened and I apologize.

Transitioning back to full-time work has been rewarding but also tiring. There is only so much time I can sit in front of a computer without driving myself (and my wife) crazy. At the same time, my wife has made a job change as well. Last month she accepted an offer that has moved us from the Willamette Valley to the high desert of Central Oregon.

With my new location I’ve debated changing the name of this blog to the “High Desert Trader” to reflect my new surroundings. In the end, I’ve decided to keep it “Rip City Trader.” Although I no longer live in Portland, it will always be my hometown.

And now that we have settled into our new residence, I vow to maintain my pledge to blog at least once a week beginning now. My hope is that my once growing audience returns and we can resume the verbal scrum between bulls and bears in the world’s futures markets.

Despite the massive changes in my life these past few months, I have continued to trade with my attention squarely upon palladium. It’s a market I’ve been watching for a while that experienced an impressive multi-year breakout from consolidation a few weeks ago. Thanks to a perfect storm of fundamental and technical phenomena, palladium looks like the trade of the year. As events unfold in key mining countries, South Africa and Russia, as well as the global economy, I’ll keep you updated with technical analysis mixed in for good measure. Although I like to debate the merits of fundamentals, at the end of the day I am a technical trader and base my trading system upon technical analysis.

Stay tuned for my next blog post soon…it covers another market that I’m excited about both from a fundamental and technical perspective that presents another potentially profitable opportunity. 🙂

Tuesday Links: Corn’s 2014 Outlook; Brazil’s Crude Oil Industry Faces Reality

Content you may find interesting on this bone-chilling morning across the USA…

Futures Links

Coffee breaks out (Inside Futures)

World’s largest banks see steady to lower corn prices this year (Agrimoney.com)

Brazil’s crude oil plans hit reality (Washington Post)

ICE cuts its soft commodity trading hours, starting February 3 (WSJ)

Farmer survey suggests smaller North American soybeans, corn crops (Farm Futures)

Other Fun Stuff

CNN Poll finds majority of Americans want to legalize marijuana (CNN)

New Year’s trading resolution: keep it simple, stupid (SMB)

An oath to manage your trading biases (Andrew Grimes)

Cocoa Futures to Star Again in 2014…But Will Demand Strength Continue?

Overall, 2013 was an up-and-down year for most futures markets as raw materials from corn to gold to sugar took a dive while natural gas and stock market futures took off. Attain capital pointed out a near 50/50 split between gains and losses for the 39 futures markets it tracks. Meanwhile, agriculture-specific commodities fell by 7.7 percent based on data compiled by Agrimoney.com.

Of the top agriculture performers, cocoa presents an interesting bullish opportunity. Despite an already impressive 21 percent price increase in both New York and London trading in 2013, the supply and demand scenarios remain bullish. Analysts across the globe unanimously see cocoa repeating as a star performer.

Laurent Pipitone, head of statistics at the International Cocoa Organization in London, told Bloomberg in a story dated December 30 that, “Consumption will top output by about 70,000 tons in the 12 months started October 1. Deficits will persist through 2018, a six-year stretch that would be the longest since the data began in 1960.”

On the supply side, analysts cite aging cocoa trees in West Africa, the world’s top producing region, and farmers switching to palm oil and rubber as major culprits for waning supply. Furthermore, weather has not cooperated this growing season. Despite a strong start to “port arrivals” for the early West African harvest in December, major trading houses expect a drop off thanks to the persistent hot and dry weather that plagued the growing season. In the short term, however, this same hot and dry weather has helped increase the pace of harvest and the size of warehouse inventory, providing traders the perfect excuse to take year-end profits.

The demand picture is somewhat less clear. The two big questions (as is often the case with commodity demand) is China’s growing appetite for chocolate and the global economy. Overall, global economic growth has revived the demand for confectionaries. Will the growing Chinese middle class take to chocolate like their European and North American counterparts? Data provided by Euromonitor states that demand for cocoa increased 6.9 percent in Asia, primarily driven by China. The firm expects a 6.6 percent increase this year.

As the supply issues are structural and probably won’t change significantly at least for a few years, demand will drive the fundamental trader’s decisions. Should global economic growth continue and the Asia chocolate binge expand, prices have nowhere to go but up.

But How Many Bulls Are Left?

Despite the year-end selloff, the market remains quite long. Cocoa’s supply issues and strong demand are no secrets to anyone who has passively watched the market for at least the past few months.  A story in Seeking Alpha noted money managers continue to add to long positions and were net long 81,600 contracts in December compared with net long 63,700 contracts in September.

To keep this market humming higher, we will need a steady stream of bullish news from Africa and a strong looking chart.

Cocoa At An Inflection Point

Front Month Daily Cocoa Chart (March 2014)

Front Month Daily Cocoa Chart (March 2014)

Looking at the daily chart of the front-month New York cocoa contract, 2013 ended with consolidation near the year’s high and then a four-day breakout to the downside. On Friday, the market retraced some of those losses but it closed below near-term resistance around $2,730—the former support level during the market’s recent consolidation.

I’ll be looking to establish a long position if the market can return to the consolidation zone early this week, which will prove a false breakout. If harvest reports coming out of West Africa get worse, as analysts expect, they just may reignite bullish fever and help push cocoa above its 2013 highs. Keep in mind that the margin of error is small for the bulls with so much bullish news already priced in.

Of course, markets seem to top when bullishness sentiment is strongest and it has maintained a strong six-month uptrend, so I will remain wary for the time being until we can make new highs. What looks initially like a correction can quickly become a change in trend, often before most realize it. I may switch course and get short if the recent downtrend is confirmed.

Good luck out there!

Friday Links: A Brief, Modern History of Gold Exploration and Trading

Stuff I’m reading today…have a great weekend everyone!

Oil futures: more guess than good judgment (Market Pulse)

A brief, modern history of gold exploration and trading (Vanity Fair)

Copper breaks down (Peter Brandt)

Traders are concerned about demand for cotton as the white fluffy stuff enters bear market territory (Reuters)

Are fund managers turning their attention to commodities again? (Market Anthropology)

Would you turn down a $3 billion offer for your company that makes absolutely no revenue? (Forbes)

USDA WASDE: Get Ready For Friday Fireworks in the Corn and Soybeans Markets

Arguably the most anticipated event of the year for any grain trader is upon us: the November USDA Worldwide Agricultural Supply and Demand Estimates (WASDE). Scheduled for release on Friday at noon ET, this report is virtually guaranteed to move the grain complex. Which direction is the billion-dollar question.

The November report is always a big one, but this year’s edition holds extra significance as the USDA canceled the October report due to the partial Federal Government shutdown. The lack of official government data at such a critical time of the annual North America farming cycle has the potential to create lock-limit moves across soybeans and corn, in particular. The October cancellation was the first ever in the USDA’s 150-year-plus history, setting up potentially unprecedented movements in price.

Analysts Expect Bearish Numbers

Since the last WASDE release on Sept. 12, corn and soybeans have remained markedly bearish. John Payne at Daniel’s Trading in Welcome to WASDE Week points out:

  • December corn has lost 45 cents and counting.
  • November soybeans has shed $1.40 off its price.

Despite some hot, dry weather in August, anecdotal yield reports from the fields have surprised to the upside and the downtrends in corn and soybeans reflect this sentiment. Todd Hultman, a DTN grains analyst, believes soybean and corn output will land on the high end of previous USDA estimates based on pre-report guesses he has witnessed:

Throughout 2013, USDA estimates of the corn crop have ranged from a low of 13.76 billion bushels in August to a high of 14.14 billion bushels in May. Soybean estimates have ranged from September’s low of 3.15 billion bushels to July’s high of 3.42 billion bushels. As we approach Nov. 8, pre-report guesses are expecting corn and soybean numbers at the high end of this year’s estimates. (How Good is the November WASDE Report?)

Regardless of the final numbers we see in the WASDE, the November report is usually fairly accurate. Senior analyst at Water Street Solutions, Arlan Suderman (a must follow on Twitter @ArlanFF101), notes that the disparity in estimated soybean yield per bushel from November to the final report range from 0.4 to 0.7. For corn, the difference can range up to two bushels either way. The real wild card is which direction output will land—more or less. Looking across the last twenty growing seasons, the final soybean yield was larger than in the November report 12 times and smaller eight times. For corn, the final yield was larger 11 times out of 20.

Image

Soybeans May Lead the Market After Friday’s Report

A focus on Demand?

Assuming the soybean and corn output does match bearish expectations, all attention will turn to demand. In the past few months, demand for both crops remains robust. Big sales headlines have helped keep the grains from completely succumbing to a full-on bear market. The respective estimated carry-outs could play an even larger role than supply in how the markets react Friday.

News You Can Use

Regardless of the USDA data revealed Friday, I will be flat at its release. In a world of high-frequency and programmatic trading, the volatility just seconds, let alone minutes, after the report’s release can inflict pain on a small-fry investor like yours truly. I will bide my time and wait for a direction to be established before I act. At the end of the day, it is not the data itself that is important, but how the market reacts to it. This is as true today as it was 100 years ago.

Before you consider trading the November WASDE, I highly recommend checking out Trading Commodities and Financial Futures, Fourth Edition by George Kleinman, president of Commodity Resource Corp. In the book, George describes his “GK’s significant news indicator,” which is essentially the price before the release of market-moving news. Use this as pivot point to help determine where to enter and where to place a protective stop. It can help you keep perspective and a level head when markets are moving and emotions run wild.

Best of luck Friday!