How Weather Influences Agricultural Trading
With the swirl of speculation surrounding climate change and how weather conditions might affect the markets, Simpler Insights wanted to present a previous article detailing this issue.
In a volatile market, traders are searching for information and economic trends that might lead to trading opportunities.
“Climate change” may be a controversial topic to some, but how can “weather cycles” help traders? The answer may be found in agricultural commodities trading.
How weather cycles influence commodity trading
Neil Yeager, Vice President of Futures Trading at Simpler Trading, sat down with Shawn Hackett of Hackett Financial Advisors, Inc., to talk about trading in agriculture and how to use climate cycles as an information source.
Hackett serves as president and CEO of Hackett Financial Advisors and has more than 20 years of experience managing money using his disciplined and effective plan. Hackett Financial Advisors, Inc., began with a focus to help educate and inform hedgers, farmers, end-users, and investors in agricultural commodities.
The following is an excerpt from the discussion between Neil and Shawn. (Not to be used for trading recommendations or advice purposes.) Watch the full video here for more insight.
Q: Tell us about Hackett Financial Advisors and weather cycles…
Shawn: “We specialize in long-term weather cycles. They include things like the solar cycle, what we call the 220-year Grand Solar Cycle, and the 60-year Great Surface Temperature Cycle.
These two big weather cycles have been repeating for thousands of years, and they repeat over and over again based on natural phenomena in the way the earth interacts with our atmosphere which interacts into space.
For the next 10 to 15 years these two very, very important cycles are in synchronicity for the first time since 1600.
Most of the time you get one cycle or the other that isn’t working. They create some very significant weather volatility. In this case, we actually have both cycles working together which makes this particular 10- to 15-year period extremely unusual and should be extremely wild.
Weather cycles affect agriculture
Q: How can traders tap into this environment?
Shawn: In terms of weather volatility and agricultural price volatility, opportunities for trading in those markets as these weather cycles play out.
The Grand Solar Cycle has a minimum number of sunspots that occur every 11 years.
About every two to 20 years, you get through a period where we have very low sunspots. Then it happens 20 years later – and we’re now in the process of beginning the next Grand Solar Cycle.
We’re about to begin this next 220-year version of the Grand Solar Cycle. So what that essentially means is the cumulative number of sunspots – or the 22-year moving average of sunspots – is rising, which means the solar activities increase. When it’s shrinking, it means that the solar activity is weakening.
We have been falling ever since 2000, and this was the last Grand Solar Cycle minimum period that started in the 1800s. We are very clear that this period of extended low solar activity is repeating and that it is going to rival that of the last one. We’re well aware of where the peak will be in the 2030s.
Do sea surface temperatures affect weather
Shawn: The second cycle is what’s called a Sea Surface Temperature Cycle.
That’s the cycle where the Atlantic Ocean surface temperatures and the Pacific Ocean surface temperatures hold steady and warm up very regularly at different times in different phases.
When sea surface temperatures are warm, the climate temperature is warming. When the sea surface temperatures are cool, the temperatures of the earth is cooling. It’s a very simple thermodynamic equilibrium process.
Every 60 years the Atlantic and the Pacific temperatures are cold at the same time. The 60-year cycle is about ready to repeat again.
The reason this happens is that the sun and the moon impact the Earth ocean currents. They see severe temperatures on the earth currents and either create what’s called upwelling flows or downwelling flows. Upwelling flows create cooler surface temperatures and downwelling flows cause warming temperatures. This has to do with the different rotations of the sun, the diffraction of the moon, and different magnetic fields that impact sea surface currents that impact on a very regular scale.
Ice core studies and tree ring analysis have confirmed these cycles for thousands upon thousands of years. This cycle is now about ready to begin, just as this Sea Surface Temperature Cycle, is just about ready to begin. In fact, both of them have already begun.
So with these cycles in place, looking at agriculture, you can see the general decline we’ve seen. This is the Pacific Ocean temperature going into a colder territory. This Atlantic Ocean is now moving into the cold phase, just like the Pacific Ocean has already moved into the cold phase.
Q: How do these cycles affect agriculture trading?
Shawn: What really is the crux of all of this? Why do we get amplified volatility when the sun is quiet and when the co-surface temperatures are in a serious cold phase? It is because it changes the upper airflow pattern of the jetstream both north and south.
This means extreme volatility, extreme cold, extreme heat, extreme floods, and storms.
One of the more important features of this is it does create more extreme, longer cold winters over time, which means shorter growing cycles, longer winters, later spring frost, and early fall frost.
We’ve done a great job in agricultural technology in creating the ability to produce yields in hot, dry weather. We really have not done a good job to grow in cold or wet weather. That’s the general picture of where I believe we’re heading.
We’ve already seen volatility in the last couple of years along with production problems. Agriculture prices are already starting to respond to some of these.
So, this is what’s really getting us thinking about the agricultural sector as an investment, such as futures trading in agricultural commodities. There are many questions about what to do to produce enough food with this new weather regime to feed seven, eight, or nine billion people.
Do we take the production into greenhouses and grow more food that way?
I think if money and the investment went into this area, we’d be able to answer this question. But it’s going to take considerable higher commodity prices for a while before we get the technology to catch up to what’s going on with the weather volatility.
El Nino and La Nina – maybe many of you’ve heard these terms before. We go through these periods where the Sea Surface Temperature Cycle of the Central Pacific gets cold – La Nina. If the cycle gets warm, this would be El Nino.
It has a very, very different weather pattern when it meshes with these other weather cycles that we’re talking about. I want everyone to understand that we can predict El Nino and La Nina because it’s solar cycle driven.
Every time we get to this certain point the sea surface temperatures warm, suggesting we’re moving towards El Nino and getting warmer. We’re right exactly at this point again. We’re going to start to see these sea surface temperatures warm in the Central Pacific and moving on to El Nino.
This cycle goes back hundreds of years and repeats over and over and over again. The markets that have done well, to the upside, the last couple of years will not be the markets that do well in the next couple of years, and vice-versa.
Real-world examples of weather cycle trades
Q: When we break this down into a real-world example in a specific market and do a bit of analysis, how do we utilize these weather cycles and these weather variables?
Shawn: So one area of the market that is particularly impacted as you move to an El Nino weather pattern is the cocoa market, predominantly grown in West Africa. West Africa produces 70% of all cocoa in the world.
El Nino tends to produce hot, dry weather during the prime growing season. That’s historically been when cocoa production gets hit. Prices start to really respond to address the shortage that’s coming.
We went back and looked at every major drought that occurred in West Africa over the last 50 years and looked for the certain micro-weather variables that led to a drought occurring in West Africa. They included the cooling of the Atlantic Ocean and that’s clearly already happening. We’re monitoring all of these cycles.
This is all going on within a grand solar cycle, which means an amplified pattern. Everything we’ve seen in the past is going to be even more amplified – more severe drought, even warmer temperatures than normal. Just think of the Australia drought which was the worst drought in 150 years.
This grand solar cycle amplification blows these weather extremes out of the water.
The kind of work that we provide for customers is detailing these longer-term cycles and bringing into the fray these micro-climates.
We bring it into an action plan of when to enter a trade or when do we think prices might react economically and when should traders hedge in either direction.
I talked about how these indicators forewarn what lies ahead. This means you’ll see climate indicators moving and giving the signal of drought before the drought actually starts to get to center stage.
It does us no good if an indicator tells us what will occur after the drought is already in place and the market is already reacting. We want indicators – fundamental climatic indicators – that can tell us months in advance that the probabilities are increasing that are more impactful.