The El Nino Commodity Trading Guide: Watch Out For Wheat

With each passing week it appears the odds are increasing for the weather phenomenon known as “El Nino.” Check that…the odds are increasing for a “Super El Nino.”

Yeah, sounds serious.

The last time we had one of those was in 1997-1998. Forecasters suggest the probability of an El Niño is now above 70%, which I hear is an unusually high probability estimate considering the time of year, hence the “super” talk. Of course, high probability does not mean certainty and especially this early in the year; it could be a repeat of 2012 where in the 11th hour El Nino never materialized.

While we anxiously await the latest Pacific Ocean temperature readings, history tells us that El Nino years can significantly influence commodity prices across the globe. The Wall Street Journal recently came out with a useful infographic on key commodities that often experience price spikes including coffee, wheat, corn and cocoa as well as metals such as copper and nickel. Apparently El Nino usually leads to excessive rains in Chile that can flood copper mines.

Of the list, wheat is the most intriguing. The Chicago wheat contract bottomed out around $6 per bushel in March thanks to healthy worldwide stocks. However, those numbers are being slashed as I type thanks to a combination of winterkill, dry weather and now excessive heat in the main winter wheat growing areas of Texas, Oklahoma and Kansas.

The main winter wheat growing areas of California and the plains are smack in the middle of severe drought areas

The main winter wheat growing areas of California and the plains are experiencing severe droughts

On top of that, the crisis in Ukraine continues unabated, adding even more risk premium to a market that fears unrest will curtail exports and possibly reduce yields. Throw in a dry growing season in Australia, a common occurrence in an El Nino year, and we have another fundamental bullish bit of news to keep the market climbing.

As of this writing, the front-month Chicago wheat contract sits around $7.35 as it continues its bullish price trend off the March lows. It’s still early to start talking about breaking the contract high of $13 per bushel, but the game pieces are in place for that potential.

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The Top 10 Handles for Grain Futures Trading on Twitter

Want to stay up on real-time news and data for agriculture futures? These 10 pros on Twitter are a great place to start.

10) Angie McGuire (@GoddessofGrain) – The Goddess of Grain is VP of Grains for Citizens LLP and is guaranteed to provide a few chuckles. She mixes in her grain market tweets with plenty of sass and humor. She often has her ear to the ground concerning the rumors and chatter that surround the cash basis for grains, which at times can be useful for tracking price in the futures markets.

9) Agriculture.com (@Agriculturecom) – Agriculture.com is a superb media property for tracking the daily market movements of soybeans, corn and wheat. Its Twitter handle provides a useful method for staying up on the site’s freshest, most important market commentary. They have a reporter on the CBOT floor who provides play-by-play commentary of the action in the pits.

8) Dave Fogel (@ATI_DaveFogel) – David brings nearly 30 years of agriculture risk management experience to his Twitter account and it shows. Based in Bloomington, Ill., he stuffs his Twitter stream with updates on grain basis and insights from across the globe I wouldn’t otherwise know about. His no nonsense approach to Twitter provides breezy, easy-to-understand summaries of what matters most to grain buyers and sellers—vital information for any grain trader.

7) Gavin Maguire (@RtrsAgAnalyst) – Gavin is an agriculture columnist and analyst for Reuters who is a big picture thinker with gorgeous fundamental grain charts to match. For example, for the January 10 USDA report, he posted on Twitter a graph of the daily corn, wheat and soybean markets reactions to the report dating to 1986. That’s great stuff you won’t find easily for free.

6) Julianne Johnston (@julijohnston) – I’ve discovered that grain market analysts are primarily male, but that doesn’t stop Julianne from providing some of the best market commentary and insight around. Working for Pro Farmer, she is always there to provide timely export, cash basis and insights from around the Pro Farmer ecosystem. When its crop report time I make sure to keep close tabs on her handle for updates.

5) Jason Britt (@jasonlbritt) – This broker out of Missouri isn’t afraid to call it likes he sees it, providing an inside look at the psyche of a trader. He also shares the wealth, posting timely articles and keen insights from other industry experts. Topics include the weather and juicy rumors from his network that would be otherwise impossible for outsiders like me to ever hear about.

4) Tregg Cronin (@5thWave_tcronin) – A self-described “futures trader/technician/production ag/Canadian whiskey advocate” from South Dakota, he provides very unique and in-depth analysis of all types of agriculture products from the traditional grains to farmland prices to milk futures. Anyone curious about smaller agricultural markets best pay attention to Tregg’s tweets.

3) Bryce Anderson (@BAndersonDTN) – During the great Midwest drought of 2012, I was glued to Bryce’s Twitter feed. He is the senior agriculture meteorologist for DTN and provides real-time updates on weather patterns and forecasts for the world’s important grain growing regions. He does not tweet every day but when he does Tweet, I never fail to take a look.

2) Darin Newsom (@DarinNewsom) – Based out of Omaha, Nebraska, Darin is arguably the most talented pure writer out there I’ve found covering the grain markets. Equally versed in fundamental and technical analysis, his “technically speaking” blog is can’t miss stuff. From time to time he will also provide insightful technical analysis on outside markets, including oil and gas. Although a lot of his content resides behind a firewall at the DTN Progressive Farmer website, he provides plenty of invaluable information for free via Twitter.

1) Arlan Suderman (@arlanFF101) – When it comes to the grain and cattle markets, Arlan is your guy on Twitter. Not only does he provide superb information on what he is seeing for corn, soybeans, wheat and cattle, he does so seemingly effortlessly and immediately. He is the one I turn to first when the latest USDA report crosses the wire. As a senior market analyst for Water Street Solutions, Arlan is primarily focused on fundamentals and leaves some of the hardcore technical charting to others.

Honorable Mentions

There are way more than 10 great follows on Twitter for grain traders so I encourage you to also check out @IndianaGrainCo, @StandardGrain, @WhiteWheatTweet, @morrisonmkts and @TonyRohrs to name a few more. They all provide great insight into what’s happening in the markets.

Who do you recommend following on Twitter?

Friday Links: Invest in Yourself

End your week with some important financial news content from around the web.

Futures Links

Argentina lifts ban, to allow wheat exports this year (Economist)

The drought intensifies in the American West (WhiteWinterTweet)

North American cocoa grind increases 4.4% in Q4 2013 year-over-year (Reuters)

Is Palladium the metal to rise highest in 2014? (Futures Magazine)

Live cattle continues to push new record highs (Reuters)

Cotton hits five-year high (Agrimoney.com)

Other Fun Stuff

Don’t forget about the role of luck in “creating success” (Oak Tree Capital)

A wife of an American football star left an assault rifle in her rental car…LOL (Fox Sports)

Investing in your “personal capital” (Abnormal Returns)

Monday Links: Controlling Your Investment Lizard Brain

If you only have time to catch one more link fest to start your week, make it this one…

Futures Links

Is gold about to move higher? (TheArmoTrader)

Orange juice wakes up…with a 10-cent move up before a bullish crop report akin to the Duke Bros… (LaCrosse Tribune)

The 2013 Q4 demand data confirms cocoa’s bullish end to the year (Bloomberg)

The USDA on Friday: soybeans neutral, corn bullish, wheat bearish (The Poultry Site)

U.S. wheat export premiums hold steady (Business Recorder)

Other Fun Stuff

Controlling your investment lizard brain (Investing Caffeine)

The average hedge fund is an over-priced index fund (Business Insider)

Game of Thrones returns to HBO April 6! (MSN TV)

Wednesday Links: The Biggest Myths in Economics

Happy hump day! Here are some links to devour…

Futures Links

Midwest and Northeast power companies scrambled for natural gas during the cold snap (FT)

Florida orange groves emerge unscathed from record cold temps (TIME)

Chicago Wheat has near-record speculative short positions and whispers of winterkill…can it bounce out of this bear market? (Agrimoney.com)

Ignore Goldman Sach’s public top trade recommendations…you will probably lose (Zero Hedge)

China plans to cut down the total planted cotton acres this year (WSJ)

Other Fun Stuff

The biggest myths in economics…a must read on why ‘deficit doomsayers’  and the like are completely wrong (Pragmatic Capitalism)

What we learned about the market in 2013 (New York Times)

J.P. Morgan’s legal bills hit $31 billion as its stock touches an all-time high…one can only LOL (Reformed Broker)

Wednesday Links: IPO Yourself

Articles of interest today…

Everyone is hating on coal (Business Insider & Bloomberg)

The bears have eyes for $4 corn (Agriculture.com)

The market anticipates a record for global wheat production this year (Bloomberg)

Ten companies paying American employees the least (24/7 Wall Street via Huffington Post)

If corporations are people, then people are corporations. IPO Yourself! (New York Magazine)

Transcript of Ben Bernanke’s speech at the National Economists Club Annual Dinner (Business Insider)

All 32 national teams that qualified for the 2014 World Cup in Brazil (Bleacher Report)

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.

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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!