(Wall Street Journal) – Fears that the El Niño weather phenomenon will wreak havoc this summer have sent prices of wheat, corn and soybeans higher in recent weeks, as commodity investors, farmers and traders prepare for low crop yields.
Government forecasters in the U.S., Australia and Japan have in recent weeks confirmed El Niño is back for the first time since the 2009-10 farming season, thanks to a 4% temperature rise in subsurface sea temperatures in the eastern Pacific Ocean.
The price increases over the past two weeks, in part thanks to fears El Niño will cause excessive dryness in important crop-growing regions, follow a long period of relative stability. Yields for Australian wheat—which comprise 14% of the world’s exports—could fall as much as 50% according to analysts at National Australia Bank Ltd.
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 patterns around the world; it typically reduces rainfall in Australia and across parts of southeast and southern Asia. 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.
In some years, the effect has been far more dramatic. El Niño caused palm oil prices to surge by 150% over a nine-month period in 1996 and 1997, according to Nicholas Teo, an analyst at CMC Capital Markets.
Yet there remains no way to anticipate how severe the impact will be. Of the 26 El Niño weather patterns observed since 1900, only 17 resulted in widespread droughts in Australia, according to the country’s Bureau of Meteorology.
“Every El Niño is different, including its duration and intensity, as is its impact on agricultural production,” analysts at Rabobank said in a note. They said the price impact could be deepest for robusta coffee—used in instant coffee—raw sugar and wheat, crops grown in countries such as Vietnam, Indonesia, Australia and Brazil that are likely to be affected by El Niño.
Garry Hansen, a farmer who grows wheat as well as raises cattle and sheep on an 8,000-hectare farm in Coomandook in southern Australia, is already concerned about the area’s dryness. The region has had little rain over the last two years.
“We don’t have a lot of moisture in the bank and we are a little bit worried about the forecast. We could do with the rain,” said Mr. Hansen, who added June’s rainfall was only 20% of its normal level. He said making sure there were no weeds taking water away from the wheat crop was one of the few things he could do to combat El Niño.
“You have to manage the business like it is going to rain but you also have to maximize water efficiency,” said Mr. Hansen.
Wheat exported from Brisbane on Australia’s eastern coast, near to farmland that could be most affected by El Niño, is already trading at a premium of more than 10% to wheat shipped from Adelaide in South Australia, said Rob Imray, managing director at commodity marketing firm Farmarco Australia.
It may take a few months before El Niño’s impact is felt in other agricultural commodities. Palm-oil harvests will be affected by drier weather, but the extent won’t be visible until six months after El Niño occurs, Singapore-based Golden Agri-Resources, the second-largest producer of the commodity, said in an email.
“As El Niño has just started, it is currently too early to estimate production output for 2016,” the company said. It said palm-oil farmers could apply fertilizer to their land earlier than normal to help counter any worsening of weather conditions.
El Niño could boost trading firms that act as middlemen between buyers and sellers of food. Such firms tend to profit more when commodity prices are volatile—provided they read weather and market conditions correctly.
“We are watching [the situation] like a hawk and we will see what happens,” Sunny Verghese, chief executive of Singapore-based trader Olam, said earlier this year. He said El Niño could lead to shortages of wheat, corn and sugar in some Southern Hemisphere countries, although higher rainfall could help crops elsewhere.
Market fears about the impact of El Niño have eased due to a good start to the monsoon season in India and Bangladesh, said Aurelia Britsch, senior commodities analyst at BMI Research. The monsoon season has brought more rain than normal despite earlier forecasts that India’s rainfall would be down by 12%, while the weather in northern parts of Asia has been broadly in line with historical averages.
Any upward pressure on food prices from El Niño could also be offset by ample stocks of several commodities, particularly of rice, palm oil and sugar, some analysts say.
And while dry conditions could weigh on crop yields in Asia, wetter weather caused by El Niño in South America could boost crops of soybeans, corn and sugar there.
