Wheat Production
Crippled by El Niño By Chris Orr, Editor of Weather Trader Dear Sovereign Investor, Just before sitting down to write today's article, I put water, a little oil, sugar, salt, yeast and flour into my bread maker. In a few short hours, my house will be filled with the wonderful scent of baking bread. The combination of these basic commodities yields such a comforting scent when baked, conjuring up mental images of simpler times and simpler needs.
But this most basic staple that Americans tend to take for granted could see its price jump this year due to El Niño. Wheat will be one of the commodities that is hit the hardest around the globe as El Niño shifts weather patterns and extends droughts.
Insufficient rain will make fields stubby and brown this year across parts of Australia, India and the U.S., tormenting farmers.
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The wheat fields of Kansas, Oklahoma, eastern Colorado and western Nebraska are wilting under the strain of four years of drought. Crop surveys this spring show stunted plants are the norm. On top of that, Kansas had a hard freeze April 16 that damaged already weakened wheat.
It will take a lot of rain to make the soil moist enough for a good crop but that rain won't come until it's too late this year. The western and southern Great Plains desperately needs between three and nine inches of rain.
What's more, as El Niño shifts the jet stream across the Western Hemisphere, the risk of hailstorms will grow, further damaging the crop — or what's left of it.
The situation doesn't look any better overseas, where El Niño is already causing drier-than-normal weather conditions across India and Australia.
It is difficult to figure out exactly what is happening with Australian wheat because the data and analysis is incongruent. Australian analysts expect an average yield across the western part of the country this year while analysts here expect a record Aussie crop. However, the latest reports from eastern Australia indicate wheat production fell to a four-year low due to dry weather as El Niño was in its formative stages.
I suspect El Niño will continue to deepen Australia's drought and I don't expect traders to price in the decreased yields until there is an official declaration that El Niño exists.
Then there's India. After a year of record wheat production, India is also facing drought. Wheat output for the year ending in June is expected to be 95.85 million metric tons, about 2 million more than last year.
The coming year does not look as promising, however. The monsoon, which irrigates about half of India's farmland, will be one to two weeks late and this year's monsoon rainfall will be less than normal because of El Niño. Taking Advantage of Volatility in Wheat As you can see, wheat production during the upcoming growing season will be lower for the U.S., Australia and India because of drought.
Europe looks like the bright spot with favorable weather conditions, but Ukraine's political unrest may curtail exports. Ukraine produces 6% of the world's crop while Russia produces 11%. Exports from the region could very well depend on the resolution of the conflict.
The final player in the economy of wheat is China —the world's number-one consumer of the commodity. Australia's wheat exports to China increased 124% this year and China's global import jumped by 5,300% between December 2012 and December 2013.
Drought has restricted China's ability to grow enough wheat and this year's El Niño will enhance the dry conditions across the east-central part of the country. As a result, China will need to import large quantities to meet demand.
If you have been riding the wheat price up using the Teucrium Wheat Fund ETF (NYSEArca: WEAT), watch for a pullback in wheat futures contracts, which will be reflected in the exchange-trade fund (ETF). After a 20% increase in wheat futures, prices are expected to come down about 20% this summer and then rise again this fall as El Nino-induced drought batters farmland. Such volatility will make investing in wheat this year tricky, but your best bet will be to exit WEAT this summer when prices drift lower. However, I expect wheat prices to rebound later this summer and you'll want to get back in to ride the price back up. There's a silver lining in every cloud,
Chris Orr
Editor, Weather Trader P.S. El Niño will continue to wreak havoc around the globe until late 2015, affecting crop production levels. There will be a number of great investment opportunities that arise as a result. To learn more about how you can profit from changes in the weather ahead of the rest of the investing crowd, I will be one of the many presenters at the Total Wealth Symposium this September. To see the entire line up of presenters and get early-bird pricing before it goes up this week, click here. | |
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