Over the past year, compliant weather and abundant planting have driven up global grain yields, and driven down prices. Now, with the emergence of El Niño, unusual rainfall patterns in many countries -- including the U.S., the world’s largest corn producer -- is lifting prices.
El Niño is a periodic disruption of normal weather patterns over the Pacific Ocean that can cause excessive rainfall in some food-growing areas, and drought in others.
Midwestern corn producers are lamenting fields that are too water-logged to work in, while rice growers in Thailand and the Philippines are facing rainfall currently running some 40 percent below normal. El Niño can crimp the Indian monsoon, but every instance of the weather pattern is different, and so far this year, the monsoon seems to be developing well. In Brazil, El Niño may be good for coffee and sugarcane, but effects on soybeans and corn can vary and are still unclear.
Besides the development of El Niño, grains are also exhibiting positive technicals. Kyle Crystal, CMT (portfolio manager at CC Global Advisers, LLC) notes, “Corn is forming a major low. Long-term momentum has printed a buy signal and oscillators are turning bullish across all time frames.
Investment implications: When fear predominates, commodities are sold by short-term traders. Our view is that a decline in the value of wheat, corn and soybeans will create buying opportunities. On both a fundamental basis (the emergence of a strong El Niño) and on a technical basis, grains -- and particularly corn -- seem to have rallied off a significant bottom. Given the beating grain prices have taken over the past year, they are unloved, and a continued decline in prices may offer an attractive opportunity to gain exposure.
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