I once ventured an attempt at an inter-generational debate with my grandfather, asking “What do you think about climate change, Gramps?”
“I believe in climate change,” he quickly blurted out. I was surprised and curious. But that quickly ended with the second half of his weigh in… “It gets hot in the summer and cold in the winter. Been like that for years.”
Needless to say, his humor is as dry as Nebraska’s corn cobs are this year.
Like Rodney, I’ll leave that spirited debate for another place and another time. But I do want to highlight a difference between “global warming” and “climate change” and tell you how I expect the latter to affect your investments in years to come.
First, two definitions:
Global Warming: An overall warming of the planet, based on average temperature over the entire surface.
Climate Change: Changes in regional climate characteristics, including temperature, humidity, rainfall, wind and severe weather events.
It’s climate change that concerns me. As a trader, I naturally hear “volatility” when I hear “climate change.” To begin thinking about how climate change is affecting the agriculture business and food commodity prices, you have to remember that agriculture is a regional business. You can’t grow winter wheat in California’s Napa Valley just as you can’t grow grapes in Russia. At least, it’s “been like that for years,” as my grandfather would say.
But climate change could completely alter the agricultural micro-climates we’ve built multi-billion dollar businesses around over the past several hundred years. If climate change has the ability to change a region’s temperature, humidity and annual rainfall – it has the ability to make growing grapes in Napa and wheat in Russia a distant memory.
I’m not saying this will happen overnight. But a dose of common sense tells us climate change leads to volatility in the agri-business and food commodity arenas.
Take corn for example… this year’s drought, and subsequent spikes in corn prices, have garnered national headlines. But a substantial increase in corn volatility can actually be seen beginning several years ago.
Here’s a chart showing the Average Daily Range of corn futures going all the way back to the 1960s.
You’ll see the average range, until 2005, was typically below 5 cents a bushel. Occasionally it spiked to 10 cents a bushel.
But within the past six years, corn’s daily range has hardly ever been below 10cents a bushel. Now, the spikes in corn’s volatility have gone as high as 25 cents/bushel.
Volatility like this will make life more difficult for farmers, commodity traders and supermarket shoppers alike. We’re truly facing a future where “change is the only constant.”
If you haven’t done so already read the Survive & Prosper issue on “When it Comes to Commodity Prices… Don’t Confuse Weather and Climate”.