Cold wave in the United States: understand the effects on the commodities market

The prospect of a severe cold snap in the United States brings risks to the commodities market. Understand the main impacts here.

January 25, 2024

hEDGEpoint Global Markets

The beginning of 2024 is predicted to be a cold snap in the United States, which will include snowfall. Low temperatures are expected to affect up to 50% of the country, with an average of minus 30°C in some regions.

This perspective is extremely essential for the local and global commodities market. After all, the US is a major producer, supplying food and energy to the entire planet.

This relevance means that climate change in the US brings volatility to the commodities markets. In this article, you’ll find out all the details.

Enjoy reading!

What are cold waves?

Cold waves are caused by temperatures that are much lower than normal for the season in question. They are caused by a mass of cold air heading towards a warmer region.

They are usually temporary (lasting only a few weeks), but there are cases of prolonged cold snaps that last for weeks. The main factors that contribute to their appearance include:

  • Changes in atmospheric circulation.
  • Advancing cold fronts.
  • Topography of the land.
  • Ocean currents.

The cold wave usually brings wind, snow, frost and excessive rain. The phenomenon has a considerable impact on agriculture, with the possibility of damaging crops, which can interrupt and/or damage the harvest of grains, fruit and vegetables. There is also the risk of affecting the transportation of agricultural products.

What’s the forecast for the cold wave in the United States?

A succession of extreme weather events is expected in the United States due to the cold wave that will arrive in January. With it, the formation of several cyclones will cause major snowfalls, with practically the entire continental area of US territory impacted by the exceptional cold.

Initially, an intense storm is expected to impact the center and south of the country, bringing heavy snowfall and storm surges to the Gulf Coast. Widespread flooding is forecast in the East and Northeast, accompanied by a major winter storm in Washington and Oregon.

In some producing states such as Iowa, Ohio and Illinois, lows are expected to reach -30°C. The displacement of low atmospheric pressure generates instability, which will cause severe and widespread storms in states such as Alabama, Florida, Georgia, Louisiana and Texas.

Texas, an important beef producer, will also be considerably affected, with severe frosts that could hinder pasture recovery. The hot, dry fall in the central United States has caused the soil to dry out, making it difficult for cattle to graze.

According to data from the United States Department of Agriculture (USDA), 65% of pastures are bad or very bad in Texas. In this sense, ranchers are likely to incur high production costs in order to feed their herds with feed, hay and water.

Commodities market: what are the impacts of the cold snap in the United States?

To understand the effects of the cold snap in the United States on the commodities market, let’s look back at a relatively recent event.

In February 2021, a historic cold wave hit the country and left more than 20 people dead. As a result, naval operations and the oil and gas industry were disrupted, as was the power supply. In Houston, Texas alone, 1.3 million residents were left without electricity.

In this scenario, one of the main consequences for the commodities market, with global repercussions, was the interruption in the US production of oil and oil products. This is a very strong sector in the South of the United States, a region considerably affected by the cold snap.

Around a fifth of all US refineries were out of operation. There was also a reduction in the extraction of oil and natural gas. The bad weather also caused the closure of ports in Houston and Galveston, which slowed down supply chains both locally and globally.

Energy production has suffered at a time of high demand in the country, due to the need to use domestic heaters. With supply falling and demand rising, commodity prices are suffering the consequences.

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US cold wave threatens agriculture

The cold wave of 2021 has had an impact on wheat crops in the US Midwest, as low temperatures have affected the development of the crop. These adverse conditions led grain prices to reach their highest levels in just one week on the Chicago Mercantile Exchange. The risk of winterkill remains for the current harvest.

Entire crops can also be burned by frost, such as corn, sugar cane, and cotton. Both snow and frost have the risk of degrading the crop from the inside out, affecting the photosynthesis capacity and productivity of the crop.

In addition, the cold snap often pauses shipments of grain and livestock, which threatens supplies to the entire planet. As a result, roads are likely to be closed, which also interrupts the flow of workers to silos or slaughterhouses.

This is a situation that we need to monitor closely this year, given the likely cold snap that could accentuate the volatility of commodity prices.

How important is risk management in this scenario?

There are different types of risks in the commodities market. Among them are climatic challenges, such as the imminence of a cold snap in the United States. We can’t manage climate risks, but we can manage the volatility of commodity prices.

After all, these changes in the weather trigger changes in supply and demand, as was the case with oil and wheat during the 2021 cold snap in the US. In a market susceptible to constant fluctuations in values, it is essential to have a partner who understands all the aspects that can affect business.

In this regard, hEDGEpoint has a market intelligence team that studies all relevant events in depth. We analyze, prepare reports, and generate important insights to contribute to decision-making.

We combine the knowledge of our multidisciplinary team with hedging products that allow the value of the commodity to be fixed. Thus, the purchase or sale can take place at a future date, with the price previously determined, using derivatives.

So if you want to protect yourself from price volatility, talk to a hEDGEpoint professional. We are here to help you.

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