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, Chris Orr LLC (11 clicks)
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Summary

  • El Nino will emerge around April 30.
  • It is expected to be the third strongest since 1950.
  • Commodities will be the first to feel its impact.

El Nino will be in the forefront of the news cycle during the next month as it continues to strengthen across the equatorial Pacific Ocean. Its impact is already being felt with drier than normal weather across parts of Brazil and Indonesia. Its influence will soon spread to other regions.

El Nino is a cyclical warm ocean current that extends from northern Peru to Indonesia, changing air pressure and wind patterns during its lifetime. It occurs every few years and varies in strength. We've had four since 2000 and the last one was in 2009-10.

It became obvious last July that El Nino was going to form this year. As rainfall began to taper off across Indonesia, Brazil and northern Argentina in December and January, it became clear that it was also going to be a strong El Nino. Now, it appears that it will emerge in full-force around April 30.

El Nino Timeline

As it became increasingly clear last summer that El Nino would form this year, strong precursor events began showing up. Rainfall patterns over Australia, Indonesia and South America that are typical before an El Nino appeared in December and January as deep ocean temperatures began to warm.

As El Nino emerges at the sea surface near and east of Galapagos this month, it will first flow to the coast of Ecuador and northern Peru. The warm water will then flow westward toward Indonesia during June and July, and by August it will be full-blown.

I expect it to start to weaken between April and June 2015 and nearly disappear toward October 2015. Its influence on weather patterns, however, will linger through January 2016.

This El Nino will likely be strong, perhaps the third strongest since 1950. To give you some perspective, it will be stronger than the 2009-10 event but weaker than the one in 1997-98.

El Nino's Impact

Coffee (NYSEARCA:JO) has already felt a price jolt this year due to El Nino. Dry conditions will spread north to Central America and southern Mexico this summer, and that will have a negative impact on the coffee crop. It will also affect the fruit crops and affect Fresh Del Monte Produce (NYSE:FDP).

The drought will deepen across Indonesia, and that will further damage the palm crop. The supply of cocoa (NYSEARCA:NIB) will also tighten up as El Nino's dry weather expands across Indonesia.

The Indian monsoon will start on time, but weaken earlier than normal this year. India's crops will suffer as the rain tapers off too early.

Near-normal rainfall will return to the Great Plains which, at the very least, should maintain soil moisture for this year's crops of corn (NYSEARCA:CORN), soybeans (NYSEARCA:SOYB) and wheat (NYSEARCA:WEAT). There are indications the western Corn Belt may start to see slightly above normal rainfall in July and August.

Perhaps the greatest impact on the U.S. will be the end of the California drought next winter, which will be positive news late this year for growers. In the meantime, the lack of water to sustain hydroelectric power will make natural gas powered generation attractive, such as Calpine Corporation (NYSE:CPN).

Investor Implications

Once El Nino hits the news cycle with a fevered pitch in May, expect commodity prices to really start to move. It will be important to get in early before El Nino is fully priced in come June, July and August. As always, the users of the commodities will also be impacted, perhaps in a greater way than the underlying commodity itself.

Source: El Nino Has Arrived