{"id":195023,"date":"2023-08-18T10:45:00","date_gmt":"2023-08-18T14:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=195023"},"modified":"2023-08-18T12:36:27","modified_gmt":"2023-08-18T16:36:27","slug":"what-does-el-ninos-return-mean-for-commodities","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/commodities\/what-does-el-ninos-return-mean-for-commodities\/","title":{"rendered":"What Does El Ni&ntilde;o&#8217;s Return Mean For Commodities?"},"content":{"rendered":"\n<p><em>The El Ni\u00f1o weather phenomenon is back on the radar. A new update from the World Meteorological Organization (WMO) forecasts that there is a 90% probability of the El Ni\u00f1o event continuing during the second half of 2023.&nbsp;&nbsp;<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-the-el-nino-phenomenon\"><strong>What is the El Ni\u00f1o phenomenon?<\/strong><\/h2>\n\n\n\n<p>The El Ni\u00f1o Southern Oscillation (ENSO) is an oceanic-atmospheric phenomenon with origins in abnormal variations in surface water temperatures in the Central and Eastern Pacific (Latin American coast). It comprises two opposing phenomena (La Ni\u00f1a and El Ni\u00f1o) that historically occur every 2 to 3 years. La Ni\u00f1a brings colder, wetter weather (lasts between 1-3 years), while El Ni\u00f1o brings warmer, drier weather (lasts between 9-12 months).&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-typical-impacts-of-el-nino\"><strong>Typical impacts of El Ni\u00f1o<\/strong><\/h2>\n\n\n\n<p>When El Ni\u00f1o starts picking up, trade winds slow down and the warm water near Asia starts moving back eastward across the Pacific, reaching the coast of South America. The drift in warm water also moves evaporation and rain such that southeast Asia and Australia tend to get drier while Peru and Ecuador tend to see more precipitation. El Ni\u00f1o typically picks up over the summer and shows its strongest effects over the winter in the Northern Hemisphere. However, the characteristics of the El Ni\u00f1o vary according to its timing and amplitude.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-figure-1-el-nino-climate-impacts-december-february\"><strong>Figure 1: El Ni\u00f1o climate impacts December &#8211; February<\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"700\" height=\"381\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/08\/el-nino-18-august-2023.jpg\" alt=\"Figure 1: El Ni\u00f1o climate impacts December - February\" class=\"wp-image-195024 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/08\/el-nino-18-august-2023.jpg 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/08\/el-nino-18-august-2023-300x163.jpg 300w\" data-sizes=\"(max-width: 700px) 100vw, 700px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 700px; aspect-ratio: 700\/381;\" \/><\/figure>\n\n\n\n<p>Source: National Oceanic and Atmospheric Organisation (NOAA).&nbsp;<strong>Historical performance is not an indication of future performance and any investments may go down in value.<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-world-sees-hottest-july-on-record\"><strong>World sees hottest July on record<\/strong><\/h2>\n\n\n\n<p>El Ni\u00f1o weather disturbances, which affect the entire Indo-Pacific region, lead to heatwaves and droughts. This is why the developing El Ni\u00f1o is likely to amplify the negative effects of climate change in Asia-Pacific, South and East Africa and the Americas. So, it comes as no surprise that large parts of the Northern Hemisphere have witnessed intense heat and devastating rainfall in the first half of 2023. July is expected to be the hottest month on record<sup>1<\/sup>; China set a new national daily temperature record in July and was hit by record-breaking rainfall at the start of August<sup>2<\/sup>. Large parts of the USA were also gripped by extensive heatwaves, with high temperatures in numerous places<sup>3<\/sup>. Canada experienced its worst wildfire season on record, as did parts of the Mediterranean.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-implications-for-agricultural-commodities\"><strong>Implications for agricultural commodities<\/strong><\/h2>\n\n\n\n<p>The growing of agricultural products is sensitive to weather patterns. For some crops, El Ni\u00f1o could boost production, while for others it could damage production. Should the weather event intensify, it could be a significant catalyst for price gains in cocoa, soybean oil, sugar and grains. Meanwhile it could be price negative for cotton and coffee.&nbsp;<\/p>\n\n\n\n<p>We analysed prices of agricultural commodities over the past 11 episodes of El Ni\u00f1o\u2019s, dating back to the 1960s. In 8 of the last 11 occurrences, wheat, soybean oil and cocoa traded higher by an average of 14%, 6% and 16% respectively, 6 months after the El Ni\u00f1o started. In 9 out of the past 11 occurrences, soybean oil and cocoa traded higher.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-figure-2-price-impact-on-agricultural-commodities-over-the-historical-el-nino-cycles\"><strong>Figure 2: Price impact on agricultural commodities over the historical El Ni\u00f1o cycles<\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"700\" height=\"354\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/08\/el-nino-2-18-august-2023.jpg\" alt=\"Figure 2: Price impact on agricultural commodities over the historical El Ni\u00f1o cycles\" class=\"wp-image-195025 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/08\/el-nino-2-18-august-2023.jpg 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/08\/el-nino-2-18-august-2023-300x152.jpg 300w\" data-sizes=\"(max-width: 700px) 100vw, 700px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 700px; aspect-ratio: 700\/354;\" \/><\/figure>\n\n\n\n<p>Source: National Oceanic and Atmospheric Organisation (NOAA), Bloomberg, WisdomTree, data from January 1963 to July 2023. Based on the last 11 El Ni\u00f1o episodes since 1963 for all commodities.&nbsp;<strong>Historical performance is not an indication of future performance and any investments may go down in value.<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-soybean-oil-benefits-from-tight-palm-oil-supply\"><strong>Soybean oil benefits from tight palm oil supply<\/strong><\/h2>\n\n\n\n<p>In the past, El Ni\u00f1o has impacted the supply of agricultural commodities such as palm oil, sugar, wheat, cocoa, and rice. Based on the local weather agency Badan Meteorologi Klimatologi (BMKG)\u2019s reporting, approximately 40 percent of Indonesia\u2019s oil palm area experienced below-normal precipitation in June 2023<sup>4<\/sup>. The BMKG also indicated that El Ni\u00f1o weather patterns are at weak-to-medium intensity and are expected to peak in August to September 2023. The shortage of palm oil tends to have a knock-on effect on demand for close substitutes such as soybean oil. This comes at a time when the escalation of attacks between Russia and Ukraine is also raising concerns on the supply of edible oils from the Black Sea region. Escalating tensions and the blockade of the Black Sea shipping routes are likely to aggravate the global edible oil and grain supply situation.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-rice-supply-at-the-mercy-of-el-nino\"><strong>Rice supply at the mercy of El Ni\u00f1o<\/strong><\/h2>\n\n\n\n<p>Dry weather has been threatening crops in the world\u2019s second largest rice exporter, Thailand, with the country facing widespread drought conditions from early 2024. The government has already asked farmers to restrict their planting to just one crop this year. While monsoon rains have brought some relief to rice fields in parts of India (the world\u2019s largest exporter), the country banned exports of non-basmati white rice<sup>5<\/sup>. Tightness in the rice market could have a knock-on impact on other staple substitutes, such as wheat.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-cocoa-benefits-from-tight-supply\"><strong>Cocoa benefits from tight supply&nbsp;<\/strong><\/h2>\n\n\n\n<p>The return of El Ni\u00f1o conditions is also supporting cocoa because the weather phenomenon tends to bring hot and dry conditions to West Africa. Cocoa growing is concentrated in Africa, with approximately 70% of production in the continent. Historically, El Ni\u00f1o has led to production shortfalls as the weather phenomenon leads to drier spells in Africa during key growing periods.<\/p>\n\n\n\n<p>This year, farmers in Ivory Coast, Ghana and Nigeria have reported signs of black pod disease, which causes cocoa pods to turn black and rot. That could also affect the quality or curb the output of beans. The cocoa market is expected to be in a third year of deficit in the 2023-24 season which should keep cocoa prices well supported.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-conclusion\"><strong>Conclusion<\/strong><\/h2>\n\n\n\n<p>While an El Ni\u00f1o event is not guaranteed (it has less than a hundred percent probability), and the strength or the duration of the event remain uncertain, it comes on the heels of war which has caused significant disruption to the flow of grains and oilseeds. Inventories of many agricultural commodities (wheat, corn, soybean oil and cocoa) are trading below their 5-year averages, making it harder to absorb a production shock<sup>6<\/sup>. El Ni\u00f1o could, therefore, be price supportive for these agricultural commodities.&nbsp;<\/p>\n\n\n\n<p><strong>Sources<\/strong><\/p>\n\n\n\n<p><sup>1<\/sup>&nbsp;Source&nbsp;World Meteorological Organization.&nbsp;<\/p>\n\n\n\n<p><sup>2<\/sup>&nbsp;Source&nbsp;China Meteorological Administration.&nbsp;<\/p>\n\n\n\n<p><sup>3&nbsp;<\/sup>Source&nbsp;US National Weather Service.<\/p>\n\n\n\n<p><sup>4&nbsp;<\/sup>Source&nbsp;United States Department of Agriculture, as of 3 August 2023.<\/p>\n\n\n\n<p><sup>5<\/sup>&nbsp;Source&nbsp;Indian Ministry of Consumer Affairs as of 21 July 2023.<\/p>\n\n\n\n<p><sup>6&nbsp;<\/sup>Source&nbsp;United States Department of Agriculture, as of 31 July 2023.<\/p>\n\n\n\n<p>&#8212;<\/p>\n\n\n\n<p>Originally Posted August 17, 2023 &#8211; <a href=\"https:\/\/www.wisdomtree.eu\/en-gb\/blog\/2023-08-17\/what-does-el-ninos-return-mean-for-commodities\">What does El Ni\u00f1o\u2019s return mean for commodities?<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Every two to seven years, the equatorial Pacific Ocean gets up to 3\u00b0C warmer (\u2018El Ni\u00f1o\u2019) or colder (\u2018La Ni\u00f1a\u2019) than usual, triggering a cascade of effects around the world. <\/p>\n","protected":false},"author":621,"featured_media":195024,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21,5,8,9,26,3],"tags":[429,147],"contributors-categories":[13714],"class_list":{"0":"post-195023","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-commodities","8":"category-europe-middle-east-africa","9":"category-region","10":"category-securities","11":"category-text-articles","12":"category-traders-insight","13":"tag-agriculture","14":"tag-commodities","15":"contributors-categories-wisdomtree-europe"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.3) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What Does El 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