If you follow the commodity markets, you know that weather can have a dramatic effect on your investments.
A flood, drought, hurricane, tornado, or even something as simple as the changing of the seasons can be a game changer.
For example, flooding along the Mississippi River earlier this year damaged roughly 3.6 million acres of U.S. cropland. Arkansas lost about 1 million acres, with Illinois, Mississippi, Missouri and Tennessee also affected. The floods hurt about 2 million acres of cornfields, affected upwards of 40% of the nation's rice crop, and drove wheat prices to historically high levels.
Surprises like these aren't confined to the United States, either.
Thailand this year experienced its worst floods in more than a half-century. Thailand is the world's largest rice exporter, and flooding may have wiped out as much as 14% of the country's paddy fields, potentially erasing the predicted global glut.
Meanwhile, droughts in China- another major rice producer – affected 16.1 million acres of farmland.
As a result, rice, a food staple for half the world, has been this year's best-performing agricultural commodity.
You might say that weather is impossible to predict, but you'd only be half right. Modern meteorology, while by no means perfect, can give us an idea of what to expect from shifting weather patterns. And if you know what to look for, you can cash in on some amazing trading opportunities.
For instance, right now, there's no weather pattern more vital – and potentially profitable – than La Niña.
La Niña is characterized by unusually cold ocean temperatures in the Equatorial Pacific, compared to El Niño, which is characterized by unusually warm ocean temperatures in the Equatorial Pacific.
During a La Niña year, winter temperatures are warmer than normal in the Southeast and cooler than normal in the Northwest.
In fact, La Nina is what brought dry winter conditions to China's grain belt and extreme rains to Australia earlier this year.
And it's not done yet. So here's what you need to know going forward.
What to Expect
The last La Niña slowly ended in the spring of 2011 only to restart again this fall, skipping the typical counter cycle warming period called an El Niño.
This weather pattern will affect prices for rice, wheat, soybeans, corn, and other crops, as well as natural gas. So understanding it is paramount to commodities investors.
The world has been in a La Niña, or at least a colder anomaly period, since spring of 2010. The expectations now are that this weather pattern will continue until the spring or summer of 2012.
This is going to have a real and serious impact on different markets around the world.
Right now, according to National Weather Service (NWS) projections, heavy rainfall will continue along the coast of the Pacific Northwest, while the eastern part of the United States will remain colder and dryer than normal.
This isn't good news for Texas and other parts of the Midwest, where it could seriously impact the winter growing zones for fresh vegetables and wheat.
So we will want to keep an eye on two key areas.
The first place to look at will be the U.S. winter wheat production regions of the Great Plains. These areas are susceptible to spring flooding issues during snow run off periods.
A colder, wetter winter in prime wheat crop growing areas will see the estimated crops yields drop over the winter-spring period. It could also delay the planting of next season's corn or bean crops, as farmland must first dry out before planting can begin.
The second area to keep an eye on will be the lower production of fresh winter veggies that will be coming out of Texas this winter. The water supply issues there are becoming extremely painful during this multi-year drought, with inflationary food prices in the United States a key issue.
This will also affect California. A draught in Texas, and possibly Florida, would leave California as the last of the winter breadbaskets producing a normal winter crop of veggies for domestic consumption.
Now let's look at how La Niña will affect energy markets.
La Niña and the Natural Gas Market
Natural gas historically has had its best seasonal pricing strength in the wintertime, when demand exceeds supply capacity. This is why the United States has the largest natural gas storage facilities in the world. We need to meet peak demand with natural gas that was stored during the summer fill months.
However, this winter may be different. The second year of La Niña should make it warmer than usual in the regions that consume the most natural gas.
Additionally, a significant number of natural gas wells have been drilled this year, with capacity held off until pricing improved. These wells are typically completed and hooked up to the pipeline as soon as possible. But this year, summer prices were so low, so some companies elected to hold the first flush production for higher price points.
I expect that the U.S. energy companies will bring on a surge of natural gas production this winter that will keep prices below normal winter rates. We will want to skip the natural gas pricing game this winter, as I expect continued weakness in the near term.
I believe this will change once the United States is closer to exporting natural gas via liquefied natural gas (LNG) cargos in 2015 or so. These cargos should help raise overall U.S. natural gas prices while helping to actually lower LNG prices globally.
How to Profit
Now that you know what to expect from La Niña, here are a couple of investments that will help you profit from it:
- The Sabine Royalty Trust (SBR) (NYSE: SBR). The company collects the income from the royalty and mineral interests of the Sabine Corporation. The trust has an average yield of 6.1% over the last five years, with a current yield of about 6%. A strong, steady high-yield investment that pays a royalty-based cash flow from trust holdings is a safer way to play natural gas and oil price volatility.
- The iPath DJ-UBS Grains TR Subindex ETN (Amex: JJG). The Grains total return sub index is an exchange-traded note designed to mirror the movement of corn, soybean, and wheat futures contract. I expect this ETN to move higher this winter as La Niña further reduces crop yields.
News and Related Story Links:
La Nina Forecast to strengthen into 2012
La Nina is Back
What is a La Nina
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Confessions of a Macro Contrarian.
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