The ‘Hurricaneomic’ Effect (Darrell Jobman)

Should storms of the magnitude of 2005's Katrina, Rita, and Wilma strike again, the expanding hurricane impact on financial markets will have a ripple effect on global markets and consumers far removed from the vicinity of the storm.

One of the first markets that typically is affected at the first hint a tropical storm is brewing is natural gas, as traders anticipate that a severe hurricane might disrupt Gulf production and shipping. In the aftermath of disastrous hurricanes will come demand for building materials, which will drive up demand and prices for commodities such as lumber, copper and other materials needed to rebuild.

But all those are the obvious plays, the moves the professionals are likely to foresee and capture before most investors realize what is happening. Successful traders who are aware of the hurricaneomic effect expand their view from the eye of the storm to opportunities beyond its immediate reach.

For example the shift to ethanol as a clean air additive, has sparked a big increase in demand. A major source of ethanol in the United States is corn. The shock of the U.S. Department of Agriculture's most recent supply/demand estimates is not that the planted acreage of corn has declined from 2005, as expected, but that the usage of corn for ethanol will increase dramatically in the season ahead. With reduced production and higher usage, spurred by energy demand, competition for corn could become intense.

Market prices of ethanol are currently over $3 per gallon, and ethanol producers could pay near $7 a bushel a corn and still have positive returns, estimates Chris Hurt, Purdue University extension marketing specialist. Corn at $7 is a far cry from the price a little over $2 a bushel that livestock producers have paid in recent years. Hurricanes, past or future, won't be totally responsible for corn prices, of course, but at least part of the current demand for corn for fuel can be attributed to the 2005 hurricanes. If another severe hurricane season exacerbates the current energy situation or if weather in either 2006 or 2007 reduces corn production, corn may be the next bull market.


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