Argentine Polar Cold

Las Lenas Argentina Web Cam

The Web Cam at the ski resort in Las Lenas Argentina.

http://img.snow-forecast.com/webcams/Las-Lenas.jpg

It’s Cold in Argentina

It’s darned cold in Argentina this winter…

From:

http://www.bloomberg.com/news/2010-07-19/argentine-industries-face-gas-shortages-as-record-cold-winter-spurs-demand.html

(I’ve bolded some interesting bits)

we have:

Argentine industrial users such as Dow Chemical Co. are suffering gas shortages amid a record cold winter in the Latin American country where temperatures fell below those in the South Pole.

and further down:

Argentine gas supplies are being reduced this month as demand increased during a polar front that brought snow to 12 of the country’s 23 provinces and pushed temperatures below those of Antarctica. Temperatures in Mendoza, the wine-producing region in western Argentina, fell as low as -8.9 degrees Celsius (16 degrees Fahrenheit) on July 15.

So “Don’t Cry For Me Argentina!” your tears might freeze on your face and give you frostbite…

Economics Point

I’ve decided I need to add an economics point to the postings about weather and climate issues. To me, it was obvious that weather and economics are ‘joined at the hip’, but I’ve realized that understanding is largely a result of growing up in a farm town then having a formal economics education at an Ag School. So I’ll be adding a “what this means to economics and making money” item to some of the weather items.

OK, why does this matter?

Natural Gas:

The demand for natural gas is more than supply. Expect natural gas prices to rise (in Argentina at least). There is also a growing trade in global LNG shipments. To the extent this continues, the LNG shippers and folks who build the equipment to handle liquid cryogenic natural gas facilities will also benefit.

Further, we’ve seen cold in South Africa and Australia / New Zealand as well. This is NOT just a local weather event. It’s a regional cooling. That means it is likely to have global implications.

And that’s part of why I was buying the LNG shippers and oil and gas trusts with large dividends some months ago.

But wait, there’s more!

Natural Gas is a key feedstock to making most “petro” chemicals. The petrochemicals really ought to be called the “carbon chemicals” as they can be made from any carbon source. EMN Eastman Chemical uses coal (and has since before folks learned to use oil for the job, later replaced with natural gas after the Arab Oil Embargo moved folks to natural gas in volume). So companies like Dow and Dupont (DD) will be losing competitive position to EMN. In South Africa, Sasol (SSL) also uses coal and will be advantaged vs the natural gas users.

What happened in 2007 is an example of what I’d expect to see again:

http://www.icis.com/Articles/2007/07/10/9043970/argentina-pe-production-plummets-to-40.html

HOUSTON (ICIS news)–Argentina’s strangled feedstock supply has brought domestic polyethylene (PE) production down to about 40% of capacity, as unusually cold weather continues to pose problems, an source at Dow Chemical said on Tuesday.

Two of four PE plants in Argentina remain down due to shortages of electricity and raw materials aggravated by a cold weather snap that brought snow to Buenos Aires for the first time since 1918, the source said.

So when it gets cold in Argentina, they cut off the chemical companies to keep the folks warm. That will put a dent in profits for chemical companies… but look for gas utilities to make money.

Natural Gas is also used as a ‘peak fuel’ for electric generation. (The gas turbines are cheap to make but more expensive to fuel than a coal plant, so coal is used for ‘baseline’ and gas for ‘peak’. That gives the optimal use of both capital and variable costs). OK, in North America Nat Gas demand has gone up due to the East Coast being hot (AC demand) and in South America it’s going up due to heating demand. Double Dip for Natural Gas! And even though most natural gas is priced locally (not much pipeline from Alaska to Argentina…) there is increasing LNG trade.

So we have at a minimum a hemispheric increase in natural gas costs that will hit DOW, DD and similar folks, but help the competitive position of EMN and SSL. AND companies like PWE and HGT ought to be getting more for their gas. Also, CHK Chesapeak and APA Apache will have a longer term benefit (they are driven by many factors, not just natural gas demand, but also exploration and production issues / costs and “sovereign risk” ( AKA “What will our government do to destroy wealth creation next?”) so may move contrary to the nat gas price for periods of time.

Crops:

OK, general cold in Argentina and South Africa (with probable for Australia / New Zealand) also cause crops to have issues. Aside from deciding that Southern Hemisphere White Wine will be better than Red for the 2010 vintage ;-) there is the likely impact on wheat and related crops. Again, the Northern Hemisphere is having a few heat issues in the mid-west and now the Southern Hemisphere is having cold issues? Watch for wheat and grain prices to rise as this understanding seeps in ( DBA and JJG have been on a 3 week rocket ride from what looks like a bottom…)

This then implies that animals that eat those expensive grains will be sold off rather than fed and meat prices ought to be dropping. COW that had been rising nicely most of the year rolled over about 2 months ago and dropped, then has returned to the Simple Moving Average stack from below. I think we’ve seen that return to the SMA stack from below is “not a good thing” and is a signal to be out of that market…

Ripples from Ag:

So for a little while, expect hamburger and steak prices to lower and bread and tofu prices to rise… This, of course, has ripples into places as diverse as Cargil (privately held), Monsanto (MON), General Mills (GIS), Kellog (K), ADM, and then on to companies like Deere DE and through them to CAT and Cummins Engines (CMI). All three of DE, CAT, and CMI look like nearly the same chart – a nice run up that has topped out and is ‘wedging in’ sideways. If the grain farmers have a bad year, how many will be buying new equipment? Prepare for a drop in those stocks as the weather impacts solidify.

You can continue further:

This ripple effect continues on out, but with less trade utility as it gets more dilute. But clearly the grocers start to have an impact and since they buy trucks too, they reflects back on the equipment makers. All these folks hire employees, who need uniforms, so if they do / don’t hire you get impacts on garment makers, that then impact the demand for cloth, often made from petrochemicals from DOW and DD and so the cycle goes.

There are also the fertilizer and pesticide makers ( MON, MOS, POT ) and then all these folks buy farm pickups, as do the workers in farm country ( Ford F dominates). And places like shoe and boot makers too…

Then the bread and beef costs ripple on to the fast food companies and impact their profits as they have modestly static prices on all those printed menus from one season to the next.

Oh, and don’t forget that crop insurance costs will be rising… so those insurance companies will be paying out more. Probably a minor part of the business, so not much trade potential, but still an economic impact.

Eventually, through increased or decreased demand for pickups and equipment you end up at the miners who need to make the ore from which the trucks and tractors are made and the steel and aluminum companies that turn it into metals.

The Trade:

So at the end of the day, weather matters, and rather a lot, to this whole web of economic activity.

The trick to trading is to find that impact which is closest to the driver, yet not noticed yet by all the other players, and hop on that trade.

So it looks like COW is a bit late to get in on the first drop, but could have a new drop soon, while JJG is early in the rise process. “Long Grain and Short COW” ought to work for a while.

Then the insurers are probably a low impact, but worth avoiding due to Sovereign Risk and their exposure combined. Not enough clarity for a short trade, but enough for a “why go there? Just Walk Away” decision. Equipment? Looks a bit too indirect at this point, but worth watching. It’s run up on an ‘economic recovery coming’ story and if that fails to mature, will start to drop. Walk Away, but watch for a short trade…

Oh, and go buy some nice older S.H. Reds to cellar, it could be a few years for more, and get ready to drink more young crisp whites in the next couple of years ;-) But it looks like you will have a dining dilemma as the pasta prices will be rising while beef falls. Life can be cruel that way… Order the Prime Rib and a crisp white? It’s the optimal economic choice, but a deep claret tastes better to me. Of course, pasta does not increase MUCH in price with wheat prices (mostly capital and labor), so perhaps that crisp white with a “Scampi Alfredo” would be best ;-)

And longer term, the demand for LNG shipping will rise. TGP has broken out of it’s sideways pause of 2 months ago into a new 45 degree rising right side run. It’s yield is down to 7%, but I’m fine with that (it’s the same dividend I bought back at 10%, just the stock price has risen now). And HGT has also dropped to a 7.9% yield as it has risen in price too. (I own both of them. Now you know why…)

So my trade would be (and in fact has been for a while now) to own the LNG shippers and gas rich Oil and Gas trusts, along with avoiding the folks dependent on gas. While watching the others for opportunities.

Collateral Possibles:

There are further collateral possibles. Things that become speculative things to watch. Sugar, for example. If it’s frozen in Argentina, could it be cooler in Brazil or wetter? (Sugar loadings were recently halted in Brazil due to rain… yes, just a brief weather event but…) So what is SGG doing (and through it, CZZ the sugar and alcohol maker…)?

Sugar SGG and Cozan CZZ

Sugar has bottomed and is rising nicely. CZZ is volatile, but also doing nicely. (I have owned CZZ for a while now) With the sugar prices rising, CZZ will do even better. (I would expect more marginal sugar areas to have weather issues prior to Brazil having much drop of production, so the loss in California sugar beets is my gain in Brazil…)

Argentine Ski Resorts ought to do well this year. To the extent it carries over into a Northern Hemisphere cold winter, places like Vail Resorts (MTN) ought to have a good year. Their chart is falling now (summer up here), but worth watching for an ‘entry’ as our summer wraps up. Folks don’t like cold cruises much, so RCL Royal Carib. and CCL Carnival Cruise Lines will need to reroute to warmer places or have cold passengers ‘talking dirt’ about their trips. (Both are in down trends at the moment, after rising until a couple of months ago.

Conclusion

I hope this has been helpful in seeing how weather is very very important to investment decisions. It is one of the largest and most direct drivers in many sectors. Travel and Leisure, Ag Related, Insurance, Home Builders, Natural Gas, Chemicals. It’s a very high impact factor.

I also hope the examples here show you how to take a simple news report and turn it into an ‘investment thesis’ for investigation. Every time a ‘weather event’ hits the news, this type of process is what runs through the mind. Who does it help, who does it hurt, what collateral impacts, what duration?

And also “Do I know something the general public doesn’t?”. So to the extent folks have embraced a ‘Global Warming” driven investment thesis and I can buy into LNG tankers and more Nat Gas demand, well, I win.