The commercial food production industry has figured out how to control just about every variable of the growing process… from Monsanto’s patented wheat seed to precisely-controlled, automated machinery.
Yet, there’s still one variable over which they have little control…
And as the science of climate change advances, more and more people are becoming convinced that we’ll see volatile swings in weather patterns going forward.
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 he killed that curiosity by following up with… “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 during a drought.
Let’s talk about the difference between “global warming” and “climate change”… then I’ll 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, when I see or hear the words “climate change,” I can’t help but think “volatility.” 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… last year’s drought, and subsequent spikes in corn prices, 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 five 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 10 cents 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.”