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Hot commoditiesPosted Friday, July 22, 2011, at 1:55 PM
As the mercury rises, so too do many commodities. Typically, high temperatures increase demand for natural gas-derived electricity for air conditioning, while hot, dry weather stresses corn and livestock.
Natural gas rises
As parts of the country suffered from triple digit heat, air conditioners were working overtime, using vast amounts of electricity. This energy demand met by increased output from utility companies, many of which use natural gas as their fuel of choice. In expectation of this increased demand, market participants bought natural gas over the last two weeks, pushing prices to one-month highs on Monday at $4.61 per million British thermal units (mmBtu).
By Friday, prices had pulled back to $4.40 per mmBtu as the longer-term forecast showed a break in the intense heat.
Corn can't stand heat
Corn prices popped to a one-month high on Tuesday morning, with corn for September delivery peaking at $7.23 per bushel. Nearly half of the corn nationwide is pollinating right now, which is a critical stage in corn growth. Hot, dry temperatures can reduce pollination rates and thereby decrease corn production.
If the crop size is diminished by this recent heat wave, the United States could continue to have dangerously tight stockpiles, causing some traders to expect sharply higher corn prices if weather problems continue.
Uncomfortably hot weather can push would-be grillers indoors, reducing demand for steaks, burgers and hot dogs, but the long-term implications are more bullish for meat demand. Heat puts serious strain on livestock, decreasing their appetite, which causes them to lose weight. Furthermore, transporting cattle and hogs can become hazardous as temperatures rise into the 90s, limiting the movement of the animals to market.
The cattle market was further supported this week as a USDA report released Thursday morning showed that the U.S. has exported over one billion pounds of beef so far this year, 27 percent higher than last year. U.S. beef is exported primarily to Japan, which has increased its imports in the wake of the disasters this spring. As of midday Friday, live cattle for August delivery were trading for $1.11 per pound, while August lean hogs were near $1.01 per pound.
Ironically, excessively cold weather does not cause these commodities to decline, as bone-chilling temperatures increase demand for natural gas heating, while livestock need more corn-based feed to help ward off winter's chill.
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Alex Breitinger, a 2009 graduate of DePauw University, is a commodity futures broker with Breitinger & Sons, LLC in Valparaiso. He can be reached at 800-411-FUTURES (3888) or online at www.indianafutures.com.