Weather And Commodities
Harsh weather conditions appear to be commonplace this year. In fact, 2010 is turning out to be a historic year for extreme weather conditions. It’s been nothing short of biblical… floods, drought, hail – you name it, we’ve seen it.
And generally, harsh weather isn’t a good thing… unless you’re investing in commodities.
If you think about it, it makes perfect sense. A vast majority of commodities are impacted by weather in one way or another. It’s one of the major differences between commodities and equities. How many stocks make huge percentage moves based on rainfall?
Weather’s impact is obvious on certain commodities – such as grains. But other commodity types can also see major price moves based on severe weather conditions.
For example, excessive heat can impact grains – which in turn impacts the cost of cattle feed. And, higher priced cattle feed drives cattle prices higher. On the flip side, extreme cold raises the demand for heating oil. Or, a major storm could disrupt offshore oil drilling, causing a spike in oil and natural gas prices.
Bad or extreme weather has a ripple effect which can reverberate throughout the entire world of commodities.
Take a look at some of the major beneficiaries of this year’s crazy weather…
First off, grains have seen some of the largest gains year to date. So far this year, wheat is up a whopping 42%, corn an equally impressive 41%, and oats up 39%. Keep in mind, these aren’t just ingredients in the bread we eat – it’s also the feed given to livestock and even used in fuels (such as ethanol).
While demand is partially responsible for higher prices, severe weather definitely impacted the grain market. Historically bad drought conditions in Russia and devastating flooding in Pakistan destroyed huge portions of crops. These are just two of the more significant climate related events we’ve seen in recent years.
But… those crop-damaging weather conditions provided an opportunity for profits. In fact, readers of the Commodity ETF Alert are earning nice profits off the higher move in grain prices.
And it’s not just grains…
Other agricultural commodities are also having weather-aided historic years. I mentioned livestock above, but how about sugar and cotton?
Sugar is up 14% year to date… but over the last six months it’s up a ridiculous 91%! Cotton is also a high flyer this year, soaring 91% year to date. Plus, coffee is up 60% so far this year. Are you wondering why Starbucks jacked up their prices recently?
Again, a big portion of these moves are because of weather. Talk about a crazy year.
Even energy commodities are feeling the effects of 2010’s wild weather. We’ve already seen offshore drilling rigs shut down due to hurricanes. And now, it’s the winter storms wreaking havoc.
We’re not even officially into winter yet and the cold and storms are hitting full force. That means heating oil is seeing an even bigger jump than is usual for the season. What’s more, natural gas – also a major source of heating – is also starting to move higher.
Many of you are already getting snowed in. And did you see what happened to the Metrodome? If you haven’t seen the video yet, check it out. It’s a good – and scary – example of how powerful a winter storm can be.
It’s not just the northern regions where cold weather is making an impact. Even Florida is dealing with freezing weather. In fact, the orange crop could be in serious danger if conditions don’t improve.
You know what that means… orange juice prices could take off. Orange juice futures have already spiked to a two-year high. And they could go much higher.
Here’s the bottom line… 2011 will be an exciting year for commodities.
As the economy improves, demand for commodities will continue to soar. Economic growth in developing countries like China and India means nearly all commodities will be in high demand for the foreseeable future.
I may not be able to predict the weather, but it’s something I’ll be keeping my eyes on. One thing I’m not afraid to predict is commodities are positioned for another great year. As winter stretches out its frozen claws, you can get some warmth knowing bad weather can lead to big profits.
Category: Commodities
