How will El Niño impact commodities in 2014?

Cocoa , Coffee , El Niño , Food , Metals , Nickel , Palm oil Apr 23, 2014 No Comments

El Niño impact on commoditiesForecasters from the United States to Australia are strengthening predictions for the arrival of an El Nino in 2014, and Goldman Sachs Group this week listed palm oil among the crops that could be hurt. The events, which affect weather worldwide, typically curb rains in Indonesia and Malaysia, the world’s two largest palm oil producers.

An El Niño weather pattern, in which surface water in the Pacific Ocean near the equator warms, is likely to develop this summer, according to the World Meteorological Organization and other prominent weather agencies, AlertNet reported. El Niño conditions are known for influencing extreme weather around the globe, such as flooding in China and drought in Australia.

El Nino “does not” always imply higher commodity prices and disasters around the world. In fact, a cooler U.S. summer and weak hurricane season would cap rallies in corn, soybeans and natural gas this summer. In addition, global ocean temperatures may bring about good early season weather for West Africa’s cocoa crop. What buyers will really be focused on is global coffee weather as crop issues in Indonesia and Vietnam could result in even higher coffee prices, months down the road. But all of this is premature and not all El Ninos are the same! Also, sugar prices tend to go higher during El Nino events, but currently there is no immediate indication that India‘s sugar crop will be compromised, just as it was during the weak El Nino, of 2009.

El Niño usually brings drier-than-normal conditions to Australia, now suffering from a drought in the northeast that has forced ranchers to cull cows. The U.S. agency NOAA estimates the chance of El Niño expanding across the tropical Pacific during the Northern Hemisphere’s summer at about 50 percent. During the worst El Niño on record in 1997-98, the phenomenon brought devastating storms to California and costly drought to southern parts of the U.S.

Model forecasts indicate a fairly large potential for an El Niño, most likely by the end of the second quarter of 2014,” according to the World Meteorological Organization. “For the June to August period, approximately two-thirds of the models surveyed predict that El Niño thresholds will be reached, while the remaining models predict a continuation of neutral conditions. A few models predict an earlier El Niño onset, such as in May. No model suggests a La Niña in 2014,” said the weather body.

The US Department of Agriculture bureau in Bangkok, in its first estimates for Thai sugar in 2014-15, pegged production at 10.38m tonnes, down 1.0m tonnes on this season’s record figure. The forecast of a decline reflects “anticipation of unfavorable weather conditions”, the bureau said, noting the prospect of an El Nino weather pattern associated with below-average rainfall in many parts of South East Asia, including Thailand‘s cane-growing heartlands.

Because of climate change, the floods and droughts that occur will likely be stronger than they otherwise would be.

A major side effect of the El Niño cycle is that less rainfall in Southeast Asia and Australia results in declining production of agricultural commodities in countries such as Indonesia, Vietnam and Thailand. Affected commodities include crude palm oil, cocoa and coffee. As a result of the looming El Niño, prices of palm oil and cocoa have increased by 10 percent in the last three months. Meanwhile, the price of coffee surged 60 percent. However, the latter is particularly brought on by severe drought in Central Brazil, the world’s most important region for arabica coffee production.

There is, however, another remarkable consequence of El Niño cycles. In previous cycles, the price of nickel has been heavily impacted by the weather phenomenon as low rainfall in Indonesia causes a lower level of electricity generation at hydropower plants thus leading to blackouts at energy intensive mining activities. Historically, the price of nickel increased 14 percent due to an El Niño cycle. However, as current inventory levels of nickel are much higher than in previous El Niño cycles, while the current global nickel demand is relatively weak, the impact of a new El Niño cycle on nickel prices is expected to be less severe compared to previous cycles.

“The impending El Nino event will likely not have a significant impact on Europe for the upcoming summer, although we will monitor the potential impacts later in the year,” said WSI meteorologist Todd Crawford.

The warming can mean an even hotter year coming up and billions of dollars in losses for food crops. Parts of South America may become dry and other parts wet in an El Nino. Peru suffers the most, getting floods and poorer fishing. However, it could bring good news for some parts of the planet, leading to fewer Atlantic hurricanes and more rain next winter for drought-stricken California and southern U.S. states. It could also bring and a milder winter for the frigid U.S. northern tier next year, meteorologists said.

An El Nino would boost risks to soft-commodity price forecasts, Goldman Sachs said. The last El Nino to form was in 2009 to 2010, and since then the Pacific has either been in its cooler state, called La Nina, or neutral.

The chances of an El Nino have increased to 65 percent from 52 percent, the U.S. Climate Prediction Center said on April 10. There are signs that an El Nino is imminent, presaging changes to global weather patterns, the UN’s World Meteorological Organization said April 15. Two weeks ago, the Australian bureau put the odds at more than 70 percent.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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