1994 Frost Risk

When the market rallied 26c in a day following the 7/20 Frost I casually remarked that I would have to look at the pre-2000s data to find similar ranges and a friend sent me a little note with two dates highlighted from 1994. Next to 6/7/1994 it said "1st frost!" +33.5c and next to 7/11/1994 it said "2nd frost!" +47c. Right now, we are on the cusp of such an event, or at least, that is the fear.

There are two challenges with this coming frost: the Frost Forecast and Price Action.

Frost Forecast:

I use 4 different forecasts to evaluate Frost. The US, Canadian, European and Brazilian Meterological services. They all have their own nuances with some being more or less sensitive. Here is how they shake out:

Frost Risk Weather Services and their Predictions for Tonight

As you can see from the above graphic, there is agreement on frost for tonight. The real question is, will it be severe or light.

Normally, I would be on the side of the skeptics and say that the forecasts showing severe frost are highly sensitive and very often OVER predict frost. For my career in coffee, these services have promised frost many times that never came.

However, the challenge is that this was a very similar set up to 7/20. We are seeing some confirmation from the other services as well as warning lights from the more alarmist services. Since the topography of the regions being hit are the same, and forecast conditions are similar, it IS PLAUSBLE that we see a similar severe damage.

Comparison of the set up in 1994 and 2021, and comparison of US and Canadian Min Temp Forecasts

Price Action:

Which brings us to the second problem. The price action at this point has been very aggressive.

The market was above 200c for several days (although today we are selling off pretty strongly) and the ICE exchange has raised margin twice--from $4050 per contract to $7500 and then $9000. This means that the "weak" shorts are gone from the market.

Moreover, the surprise of the previous frost is gone. We can be sure that many if not most of those with vulnerable positions has protected them with calls or long futures. Everyone is watching and preparing for tonight.

On top of all of that, there are new longs in the market. Both Fundamental traders and trend followers. If mother nature fails to produce a spectacularly destructive frost, there will be many longs who have suddenly found themselves on the wrong side of the market.

Note Showing Market Moves >20c in a day

The frost predictions' margin for error are razor thin at this point. Many forecasts are showing between 0 and 1 degrees celcius. 1 degree warmer or cooler will make all of the difference.

Given the high prices and the many frost hypes that I've seen come and go, I feel a bit skeptical that it will materialize sufficiently strong to be a repeat of 1994. But at this point it is a roll of the dice. And if those dice turn up snake eyes...I refer you to my friend's chart regarding 1994... +47c.