Weather Shocks Spur Rallies Defying Broad Commodity Slump
(Businessweek) – Bullish commodity investors have had little to cheer about in 2015, except the weather.
While most raw materials are mired in bear markets, from oil to nickel to corn, cold spells and droughts are fueling a few rallies. The promise of a deep freeze last week in the U.S. sent natural-gas futures to their biggest gain in 11 months. Dry weather in Brazil, the top grower of coffee and sugar cane, sparked advances for both crops. Unusually heavy monsoon rains in Malaysia sent palm oil to the highest since July.
“The weather is always unpredictable and a wild card,” Donald Selkin, the chief market strategist at New York-based National Securities Corp., which oversees $3 billion, said in a telephone interview Jan. 16. “These products are marching to their own tune — for now.”
Just six of 22 raw materials in the Bloomberg Commodity Index are up this month, defying a wider slump. Crude, wheat and copper are among those leading the index down 17 percent in the past year, touching a 12-year low on Jan. 14. Investors reduced their holdings in commodity assets in November to the lowest since 2010, Barclays Plc said.
Not everyone is convinced the weather impact will last, mostly because there are global surpluses of everything from grain to crude oil.
“With inventories the way they are, we could have deviations from normal weather and we could still have prices not do terribly much,” said Gillian Rutherford, who helps oversee $20 billion as a commodities-portfolio manager at Pacific Investment Management Co. in Newport Beach, California.
January Rallies
Silver and gold led the January advances as economic turmoil in Europe boosted the appeal of the metals as a haven. The rest of the commodity gains are tied to weather.
Natural-gas futures jumped 8.2 percent this month to $3.127 per million British thermal units on the New York Mercantile Exchange. On Jan. 14, prices surged 9.9 percent, the most since February 2014, as a blast of Arctic weather headed toward the eastern U.S. Forecasts have turned colder for January, and are expected to last into February, meteorologists said.
Natural gas is used mostly from November to March in the U.S. as cold weather boosts demand for the fuel to heat homes and businesses. The peak is January, when about 25 percent of the season’s consumption occurs, followed by February at 22.6 percent, said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York.
November was the 16th coldest in the contiguous 48 states in records going back to 1895, according to the National Climatic Data Center in Asheville, North Carolina. While the cold fizzled in December, temperatures have dropped again in much of East, with monthly averages below normal in New York, Chicago, Cleveland, St. Louis and Houston.
Brazil Crops
Arabica coffee is up 2.6 percent this year at $1.71 a pound on ICE Futures U.S. in New York, as dry weather threatens crops in Brazil, the top grower and exporter. Last year, prices surged 50 percent as output fell following the worst drought in eight decades.
Yields will drop with soil moisture averaging 65 percent to 70 percent below normal in the past 30 days, said Donald Keeney, a meteorologist at Gaithersburg, Maryland-based MDA Weather Services. Dryness will persist in central and northern Minas Gerais and southern Bahia this month, he said.
“God help us if the typical heavy rains of March don’t come,” said Luiz Eduardo de Paula, president and owner of H. Commcor, a broker in Sao Paulo. “There won’t be drinking water, so can you imagine what will happen to the production of coffee. The sky will be the limit for prices.”
Sugar Rally
Dry conditions also threaten Brazil’s cane crops in central Minas Gerais, Bahia and Espirito Santo, where rains through Jan. 13 were about 15 percent of normal since Dec. 31, said Drew Lerner, the president of World Weather Inc. in Overland Park, Kansas. Raw-sugar futures are up 5.6 percent this month on ICE, touching a five-week high of 15.49 cents a pound on Jan. 16.
In Malaysia, which produces a third of the world’s palm oil, flooding is compounding a drop in output already at a seasonal low. The floods were the worst in four decades, and the Palm Oil Board estimates domestic output in December fell the most in eight years.
Palm-oil futures on Jan. 15 reached 2,394 ringgit ($673) a ton, the highest since July, on the Bursa Malaysia Derivatives. Prices are up 2 percent this year and may average 2,500 ringgit in 2015, Kuala Lumpur-based RHB Investment Bank Bhd. estimates.
