Commodities Prices Are Heating Up on El Niño

October 13th, 2015

By:

Category: Grains, Oilseeds

cows grazing in a fresh green field 450x299(Wall Street Journal) – The El Niño weather phenomenon is starting to push up prices for agricultural commodities as its impact spreads through key crop-growing regions in Asia and beyond.

Government forecasters in the U.S. and Australia have in recent weeks warned that El Niño could be the severest in nearly two decades. Late last week, the Japan Meteorological Agency said sea surface temperatures in the Pacific are “remarkably above normal” and warned that temperatures could even reach their highest level since 1950.

In turn, farmers are warning of potential damage to their output. Sugar farmers in Brazil say heavy rain could reduce the sugar content of their cane, while farmers in Australia, Asia and parts of Africa say dry conditions could hit production of crops such as palm oil, wheat, cocoa and coffee.

A number of agricultural prices have rallied off their lows on fears of weather-related supply shortages. Sugar prices have risen 31% over the past three weeks; dairy is up 36%, palm oil has gained 13.1% and wheat is up 6.1% over the same period.

El Niño occurs when winds in the equatorial Pacific slow down or reverse direction. That warms water over a vast area, which in turn can upend weather around the world.

Some city dwellers in Asia are feeling El Niño in a different way. A heavy layer of smog has hung over Singapore since the middle of August, brought on by the burning of forests in Indonesia to clear land for palm-oil plantations. The fires have lasted longer than normal because of the dry conditions caused by El Niño, making its impact “really tangible,” according to Joseph Incalcaterra, an economist at HSBC.

The weather pattern’s full effect on commodity prices likely won’t be known for several months. El Niño isn’t expected to peak until the end of the year, while forecasters expect it to persist into 2016.

In the past, nonfuel-commodity prices have risen by 5.3% on average in the 12 months following the announcement of an El Niño event, according to an International Monetary Fund working paper.

Still, a number of national food bodies in key crop-producing countries in Asia have already downgraded their forecasts for the coming year, because of unexpectedly dry conditions. The Vietnam Coffee and Cocoa Association, or Vicofa, expects the output of coffee to fall sharply there, although it hasn’t specified the likely impact. The Thai Rice Exporters Association has predicted rice production will be down between 15% and 20%.

El Niño, by upsetting weather patterns and disrupting harvests, will affect some commodities. What might that mean the next time you decide to whip up a chocolate cake?
Augyawati Joe, a spokeswoman for the Indonesian Palm Oil Association, said plantations throughout Indonesia were experiencing drier-than-normal conditions, which are delaying the fruit’s ripening.

Moreover, the persistence of land-clearing fires has caused a significant haze that could impact production this autumn, she said.

That could affect palm-oil supplies eventually, pushing up prices for the commodity used in products ranging from processed foods to lipstick, which touched a six-year low in August.

Still, it could take about six months before the full impact on production is known, said Agus Purnomo, managing director of sustainability at Singapore-listed producer Golden Agri-Resources.

Farmers in Australia are starting to feel the heat, too.

Andrew Carberry, who grows 1,000 hectares of wheat alongside cotton, chickpeas and cattle on his farm in Narrabri, north of Sydney, said he is hoping his wheat will get away largely unscathed, though the outlook for other crops that are several months away from harvesting is less certain.

“The predictions of an El Niño seem to be coming true, and we are looking for a bit of rain,” he said.

Last month, Australia’s Department of Agriculture and Water Resources forecast the country’s wheat yield for the 2015-16 season would reach 25.3 million metric tons, up 7% from a year earlier.

However, Tobin Gorey, agribusiness economist at Commonwealth Bank of Australia, said the yield could eventually be as much as two million tons lower, following very low rainfall in September.

With conditions also quite dry in wheat-growing regions such as the Black Sea and parts of the U.S., concerns are growing about a tighter global wheat supply.

Australian wheat traders are buying futures contracts now to make sure they have grain available for shipments they have committed to later in the season, said Campbell Keene, a senior manager at Rabobank in Sydney, pushing up prices.

Farmers in Brazil, meanwhile, are fretting about the wetter weather in store. Above-average rains can lead to lower sugar content in canes and reduce the number of days available for crushing.

“Adverse conditions in Brazil might sweeten the outlook for sugar,” said Michael Underhill, chief investment officer at Wisconsin-based Capital Innovation, an investment company.

Add New Comment

Forgot password? or Register

You are commenting as a guest.