El Niño Blowing Through Ag Commodities

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El Niño Blowing Through Ag Commodities

By Tim Maverick, Commodities Correspondent

After a five-year absence, El Niño is back!

Last week, the Australian Bureau of Meteorology predicted a “moderate to strong” El Niño event for this year.

This could cause some major disruptions in many commodities markets. Especially if the weather event becomes a “substantial” later in the year.

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Wall Street Daily’s Senior Technology Analyst, Greg Miller, explained the broad effects of this weather pattern.

During past El Niños, the best-performing commodities have been nickel, zinc, coffee, cocoa, cotton, and soybean oil, according to analysts at Société Générale.

But, what about this El Niño? Let’s take a closer look at the possible effect on commodities.

Of course, we can’t predict exactly what will happen. We are talking about the weather, here. But, based on historical data, we can hazard a good guess.

Getting a Boost

The first commodities that come to mind when discussing El Niño are, of course, the agricultural commodities.

One crop that is likely to benefit is cocoa.

You see, in the past, El Niño caused dryness in Western Africa. And since most of the world’s cocoa is grown in the Ivory Coast and Ghana, cocoa output is likely to experience a hit. Many of the cocoa trees in West Africa are old, too, and may be more susceptible to dry conditions.

Supplies could get scarce and drive up the price.

Another likely winner will be coffee.

Typically, during an El Niño event, Eastern South America experiences unusual dryness, which could affect the Colombian coffee crop. Southeast Asia is also usually hit with extreme dryness. This will greatly affect the biggest producer of robusta coffee, Vietnam.

Plus, the country has already gotten less rain than normal. And one forecaster said that El Niño could cause a once in “a 100-year drought” for Vietnam.

Other commodities that could possibly be affected in Southeast Asia will be rubber, palm oil, rice, and sugar.

Speaking of sugar, El Niño often brings heavy rains to Southern Brazil. If that occurs, expect delays in harvesting from the world’s top sugar producer. And, more importantly, heavy rain will lower the sugar levels in plants.

The second-biggest sugar producer is India. Traditionally, El Niño creates weak monsoon seasons there, which would hurt the country’s sugar crop along with its cotton crop.

Wheat may also benefit as Australian farmers will likely face extremely dry conditions. Also, the anticipated wet conditions in the wheat growing regions in the United States – the Southern Plains and the Midwest – may affect the quality of the domestic wheat crop.

Lastly, soybean oil is usually a good performer because of the lowered output of palm oil in Southeast Asia from dry conditions.

Melting Metals

Interestingly, a weak monsoon season may adversely affect precious metals, too.

Rural Indians are big buyers of gold and silver. Poor crops will translate into less income and, therefore, less demand for precious metals.

On the other hand, three base metals may rise in price because of El Niño.

Past El Niños have led to dryness in Indonesia. This adversely affects both hydroelectric power and water transportation needed for the country’s copper and nickel industries.

But, in Peru, past El Niños have led to flooding. This has an adverse effect on the country’s big zinc mining industry. Plus, the global zinc industry is already facing a shutdown of two of the world’s largest mines – the Century and Lisheen mines – by early 2016.

Relief for California?

But, what about El Niño’s effects here at home?

Well, El Niño should bring much-needed rain to California. Unfortunately, it will not end California’s miseries. The drought is just too great.

Reservoirs are still well below where they should be. With the state’s biggest reservoir, Lake Oroville, at just 56% of its capacity. And the Lake Mead reservoir in Las Vegas at just 38% of its capacity. That’s a full 140 feet below what it can hold!

Rose Davis of the U.S. Bureau of Reclamation told the Los Angeles Times earlier this month, “Lake Mead hasn’t been this low since we were filling it in the 1930s.”

For the drought to end in California, the state would need to see strong El Niño events several years in a row. That’s possible, but unlikely.

In the meantime, the coming El Niño promises to keep commodities markets around the world on their toes.

And the chase continues,

Tim Maverick

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By Tim Maverick