Weather phenomenon may hit production affecting food prices

Weather phenomenon may hit production affecting food pricesMove over El Niño — your sister is coming to town. From a weak Indian monsoon to excessive dryness in Southeast Asia, parts of the world have been hit by the strongest El Niño since 1997.

But meteorologists are now looking to 2016, where there is a strong possibility that the current weather phenomenon will swiftly transform into a La Niña — which tends to bring rainfall in Southeast Asia and Australia and dryness to the US midwest.

This may be good news for commodity bulls, as many agricultural raw materials have barely felt the effects of El Niño, caused by the warming of the tropical Pacific Ocean.

“Strong El Niños are much more likely to be followed by a La Niña,” says David Streit at consultancy Commodity Weather Group. The three strongest El Niños on record — in 1972, 1982 and 1997 — all transformed into La Niñas, he notes.

Most recently, the devastating US drought three years ago, which destroyed grains and oilseeds, happened amid a La Niña year. According to the US National Oceanic and Atmospheric Administration, 2012 was the third warmest La Niña year on record.

During the 2010-11 La Niña, Australia’s thermal and coking coal mines in Queensland were hit by flooding wreaked by the associated cyclones and heavy rain. And in Colombia, coffee farmers suffered from heavy rains, with the continuing bout of wet weather leading to the spreading of a deadly tree fungus.

The La Niña warning comes as relatively high levels of inventories and the overall commodity rout have cancelled out the El Niño effect for many raw materials.

Cocoa has risen since the start of 2013 on expectations of El Niño damage, while palm oil has rebounded from six-year lows over the past few weeks due to the impact of the weather phenomenon in Indonesia. But unlike the last El Niño in 2009-10, which damaged crops in Southeast Asia and Australia and sent agricultural commodity prices soaring, agricultural markets have been affected more by supply and demand factors.

“The markets are very well supplied at the moment,” says Kona Haque, head of research at commodity brokers ED & F Man. Countries such as Thailand, India and Indonesia have had lower than normal rainfalls, but “we are not in a commodity bull environment and there is no sense of urgency”, she adds.

Agricultural products have also remained relatively unmoved as the lower than average monsoon in India, a large grains and oilseeds producer, has had limited impact on crops there.

Although rainfall for this year’s monsoon has been 14 per cent below average, intermittent precipitation helped mitigate the effects, say meteorologists. “If this had come in one fell swoop it would have been disastrous, but you had periods where rainfall disrupted periods of dryness,” says Mr Streit.

Rice was one of the key commodities that rocketed due to the lack of rainfall in Asia during the past El Niño. However, global inventories are at comfortable levels due to strong harvests in exporting countries over the past few years.

James Fell, economist at the International Grains Council, says: “El Niño has prevented prices from falling even further, but the world is still well supplied with rice.”

In Thailand, a key rice exporter, inventories at the end of 2015 are forecast to be 9.4m tonnes, falling to 5.8m tonnes next year, according to the ICG. These levels are still higher than the five-year average of 4m. India’s buffer stocks are also forecast to be 11.3m tonnes in 2015-16, slightly higher than average, says Mr Fell.

The turmoil in emerging market currencies has also mitigated the El Niño effect by making crop exports for many farmers more lucrative, as well as suppressing demand in developing countries.

In fact, the current situation has strong parallels to 1997. Although it was the most severe El Niño episode on record, agricultural products did not rally in the next 12 or even 24 months, according to economists at the CME Group.

This was due to “the general weakness of commodity prices around the time of the Asian financial crisis, which began in June 1997, as well as the Russian default, and collapse of [hedge fund] Long Term Capital Management, which occurred in August 1998”, they say.

With El Niño expected to peak at the end of the year, the effects could still move commodity markets well into next year.

Central America and Colombia are facing dryness and the lack of rains could boost coffee prices over the next few months. India’s sugar producing regions have been hit by a lack of rainfall and Indonesian copper output has felt the impact of lack of rainfall on hydroelectric power. These conditions could still worsen.

Weather phenomenon may hit production affecting food prices

Weather forecasters will continue to watch the tropical Pacific Ocean temperatures to see how strong the current El Niño becomes, and will also be on alert for a rapid cooling of the tropical Pacific in the spring. If the current El Niño reaches 1982 or 1997 levels, “this would increase the odds of quickly flipping over to a La Niña in [the Northern hemisphere] summer 2016”, says Mr Streit.

Source: Financial Times
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