Commodity investors, producers and consumers are bracing themselves for more extreme weather this year after Australia’s meteorological agency confirmed the return of the weather phenomenon known as El Niño. However, record grain production and high stock levels is likely to mean the impact on agricultural prices will be much more muted.
To recap El Niño – caused by an increase in water temperatures in the tropical Pacific – recurs every 3-5 years and typically results in drier conditions across Australia, other south east Asia, Brazil and West Africa but wetter conditions around the southern US states and coastal areas of South America.
The agricultural crops most at risk of supply disruption from El Niño include wheat (particularly Australia), rice, soybeans (mainly India), palm oil and corn (most at risk is China) with those producers based in Asia most at risk of being negatively impacted. However, grain production in other parts of the world might actually improve (report) with it creating cooler conditions in the US, helping to raise yields, although by no means guaranteed.
At first sight the strength of the El Niño doesnt appear to be correlated with higher volatility (the first chart below). However if you pick out the period in which agricultural stocks were low (particularly the 1970’s and the 2000’s) the impact becomes much more prominent.
