June marks the beginning of hurricane season, and with the destructive storms comes disruptions to commodities. Weather has a drastic impact on many markets from soft commodities to energy and everything in between. As the southern states brace for the impending severe weather, so do the commodities markets. With a predicted busier-than-normal hurricane season, which commodity sectors might be most affected?
The Domino Effect
Large storms in the Gulf of Mexico, and along the east coast, displace many schools of fish effectively lowering the yields of fishing. This may raise prices of fish-based cattle feed causing farmers to lean towards corn-based feed. While corn is typically more expensive than fishmeal, this year’s poor plantings combined with a less-than-average forecasted yield might lead to higher demand and lower supply, priming corn prices for a potential surge. Additionally, the higher costs to feed cattle may result in higher prices for meat.
A Hurricane’s Favorite Targets
Hurricane season poses a sincere threat to offshore oil rigs. While shale drilling has reduced the threat of hurricanes, it still holds influence over the price of oil and natural gas, as transportation is severely inhibited by violent storms. Texas – the largest U.S. producer of natural gas – is within the striking distance of a Gulf Coast hurricane. So is Louisiana based Henry Hub, which is tethered to the CME natural gas futures contract. Unfortunately, the gulf region is no stranger to violent storms. Now, with more rigs than ever and several, vulnerable production facilities within arms reach of hurricanes, there is still a large potential for destruction and disruption to numerous commodities markets.
Abnormal Hurricane Season
Experts are predicting an above average active hurricane season with up to 17 severe storms and a predicted five to nine hurricanes. This means that this year, more than ever, the markets are primed for disruptions. While the focus may be on how the southern states will be affected, the Midwest will also feel the impacts of these massive storm systems. Hurricanes cause major disruptions to weather patterns and can bring excessive rain and humidity to regions that do not normally experience such weather. This added moisture and heavy humidity can act as a breeding ground for pests, and increase the risk of rot, effectively lowering wheat, corn and other crop yields.
Regardless of the amount of exposure, investors can hedge now in preparation of the looming storms. If they wait too long, the markets will likely have already moved and investors can find themselves on the wrong side of the movement. One potential strategy could be to establish long positions on corn, cattle, crude and natural gas. As always, working with a professional to create a personalized strategy is the best way to reduce risk when investing in the futures markets.