Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / How Extreme Weather Is Reshaping Commodity Supply Chains
Transcript
- Lucas: So there's a CNBC headline this morning that really caught my eye — 'From Super El Niño to Europe’s extreme heatwave: How this year’s weather shocks are rattling commodity markets.' And if you look at the price action in the past week, that’s not editorializing. That’s the story. Luna: Yeah, I saw that too. And the data backs it up — corn futures up over five percent in five days, wheat barely budging, coffee down. The divergence is really interesting. Lucas: Right. So let’s unpack that. Corn is the standout this week — ZC, the Chicago corn contract, settled at 471 and a quarter this morning. That’s a 5.3 percent gain over five sessions. Meanwhile wheat is basically flat, up six-tenths of a percent. And coffee — KC futures — down 1.8 percent. Same macro, different micro. Luna: So what’s driving corn specifically? Is it the heatwave in Europe? That doesn’t hit U.S. corn belt directly. Lucas: Not directly, no. But Europe’s heatwave is threatening their own corn and wheat harvests, which means they’ll likely import more from the U.S. and Brazil. And on top of that, the lingering effects of last year’s Super El Niño are still being felt in parts of South America. Brazil’s second corn crop — the safrinha — was planted late and got less rain than normal. So supply expectations are tightening globally. Luna: And wheat? Why isn’t it joining the rally? You’d think a European heatwave would boost wheat too. Lucas: You would. But wheat has a different geography. The big story there is that Russia and Ukraine are still exporting at a decent clip despite the war. The Black Sea corridor isn’t fully blocked, and Russian wheat is cheap. So even with European crop stress, global wheat inventories are relatively comfortable. Corn’s supply-demand balance is tighter. Luna: Got it. So it’s not just ‘weather is bad, grains go up.’ It’s which grains are exposed to which weather in which regions. Lucas: Exactly. And that’s what makes this a fascinating moment for commodity traders. The weather shocks are highly localized, but the price effects are global. And then you have coffee, which is falling despite heat stress in Brazil — one of the world’s top growers. Coffee futures are down 1.8 percent this week. That seems counterintuitive. Luna: Right. I mean, Brazil’s coffee regions have been dry — that should support prices. Why is KC down? Lucas: A couple of reasons. First, the market had already priced in a lot of weather premium earlier this year when El Niño was peaking. Now some of that premium is coming out as forecasts show a potential shift to La Niña later this year, which could bring more rain to Brazil. Second, the Brazilian real has weakened against the dollar, which encourages Brazilian producers to sell their coffee stocks and lock in dollar-denominated profits. So you’ve got a supply overhang hitting the market. Luna: So the same weather event — the tail end of El Niño — is supporting corn but pressuring coffee. That’s a nice illustration of why commodity investing isn’t just about a single narrative. Lucas: Right. And cocoa, by the way, is another story altogether. Cocoa futures have been soaring for months because of structural issues in West Africa — aging trees, disease, and now erratic rainfall. That’s a separate weather dimension. But it shows that weather is not just a short-term shock — it’s becoming a permanent risk factor for supply chains. Luna: And this has real implications for inflation, doesn’t it? I mean, food prices are a big component of CPI, and we just saw the June CPI report come in at 332.6 — down a bit from the previous month. But if weather keeps disrupting crops, that disinflation trend could stall. Lucas: Absolutely. The core CPI — that’s ex food and energy — was basically flat month-over-month at 336.1. But food price volatility is still a wildcard. If corn keeps rallying, that feeds into livestock feed costs, then meat prices, then restaurant menus. It takes time to ripple through, but it does. And the Fed is watching this. The ten-year breakeven inflation rate — a market-based measure of expected inflation — ticked up to 2.24 percent this week. That’s still near the Fed’s target, but it’s moving in the wrong direction if they want to cut rates. Luna: So weather is essentially adding a risk premium to food inflation expectations. And that makes the Fed’s job harder. Lucas: Exactly. And it’s not just food. Look at energy — oil is rallying on Middle East tensions, with Brent crude above 90 dollars. But natural gas is down almost 2 percent this week, partly because a mild start to summer in parts of the U.S. has reduced cooling demand. So even within energy, weather patterns matter. Luna: You know, it strikes me that we’ve been talking about weather as a factor in commodity markets for years, but it feels like the frequency and severity of these events are accelerating. The term ‘new normal’ gets thrown around a lot, but in this case it might actually be true. Lucas: I think you’re right. And the market is starting to price in a permanent climate risk premium for certain crops and regions. That’s a structural shift, not a cyclical one. For traders, it means you can’t just look at supply and demand fundamentals in isolation anymore — you need a climate model overlay. Luna: Yeah. And for listeners who are following along, if walking through the economy with us has made something click, it’s worth knowing that listener support is what keeps this show ad-free and independent. If you’d like to help, you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, and honestly, it’s listeners like you who make it possible for us to dig into these topics without chasing the most sensational headlines. So thank you to everyone who has contributed. Luna: So back to the weather angle — I want to ask you about one more commodity that’s been oddly quiet: gold. It’s basically flat this week around 4,013. With all this uncertainty — geopolitical risk, weather shocks, inflation concerns — you’d think gold would be screaming higher. But it’s not. Lucas: Gold’s story right now is all about real yields and the dollar. Even with inflation expectations ticking up, nominal yields have risen faster, so real yields are actually higher. That increases the opportunity cost of holding gold, which pays nothing. Plus the dollar has been firm. So gold is stuck in a range. It’s a reminder that even in a world full of risks, gold needs the right macro mix to rally. Luna: So weather drives grains, geopolitics drives oil, and the Fed drives gold. Simple, right? Lucas: If only it were that simple. But for this week, at least, that framework holds up. The key takeaway for me is that weather is becoming a non-diversifiable risk for commodity portfolios. You can hedge a single crop, but you can’t hedge the climate. Luna: And that’s a sobering thought for anyone involved in food production, logistics, or investing in agricultural supply chains. Lucas: It is. And it’s why we’ll keep tracking these stories. Thanks for listening, and we’ll be back tomorrow with more.