The real El Niño risks an upset to commodities markets
Commodity investors are in a twist about the weather.
Warmer ocean temperatures last spring indicated an El Niño event was on the horizon, signaling buys, sells, and hedging positions in securities linked to products impacted by storms and droughts. Everything from sugar prices to coffee futures were retooled.
But the El Niño yawned, only to be officially declared this March. That year-long lag crimped the wide commodities market price swings on which traders profit. Now, as the El Niño is unleashed in earnest, producing weather extremes throughout the globe, investors are too timid to try and guess which way the wind is blowing -- literally.
An El Niño event is a disruption of the ocean and atmospheric relationship in the tropical Pacific that affects weather and climate. It is brought about by warmer ocean temperatures near the Equator. Typhoons, droughts, floods, and higher temperatures in varying degrees often follow, not always to extremes. The follow-on affects hit food prices, consumer goods, and, of course, raw materials.
For example, the Australian drought has already damaged wheat crops. That means wheat prices and the cost of bread will likely rise. Extend that example to beef, chocolate, rubber, minerals, and even fish.
A strong El Niño brings rainfall to the west coasts of the Americas, yet dries out areas farther east, producing droughts in places such as Indonesia and Australia, according to the National Oceanic and Atmospheric Administration (NOAA).
Last July, Maplecroft, a global risk analytics firm, issued a stark warning to companies with global supply chains to mind the affects a strong weather pattern could bring. It noted that a weak monsoon in India and Southeast Asia could hurt rice, corn, soybeans and cotton grown there. Rubber is yet another staple produced in the region.
The Financial Times reports investors are taking recent reports of the El Niño strengthening less seriously, however, largely because of overblown forecasts from last year.
The evidence now is that the El Niño will strengthen throughout the year. NOAA's Climate Prediction Center reported Thursday, "There is an approximately 90% chance that El Niño will continue through Northern Hemisphere summer 2015, and a greater than 80% chance it will last through 2015."
El Niño's affects are already being felt in the grocery markets, if not the capital markets. The price of anchovies has risen due to warmer waters depleting fish stocks, and a ban on fishing off the Peruvian coast. In turn, fishmeal commodities futures prices have pushed higher (anchovies are a main ingredient in fishmeal). And the drought in California, a major agriculture producer for the world, has worsened crops and even forced ranchers to slaughter and ship cattle elsewhere. That has translated into rising beef prices.
But a stronger El Niño pattern could shift things. Just hours after NOAA's new El Niño prediction was released, news outlets were touting the chances for drought relief.
Weather forecasts are key for commodities investors. Given new outlooks, many might want to unlock some of their positions, and brace for new weather patterns ahead.
Thomas M. Kostigen is the founder of The Climate Survivalist.com and a New York Times bestselling author and journalist. He is the National Geographic author of "The Extreme Weather Survival Guide: Understand, Prepare, Survive, Recover" and the NG Kids book, "Extreme Weather: Surviving Tornadoes, Tsunamis, Hailstorms, Thundersnow, Hurricanes and More!" Follow him @weathersurvival, or email kostigen@theclimatesurvivalist.com