La Nina's Effect on Global Commodities in 2011
In the weather and climate community, 2010 will be remembered as a year where the strong La Nina pattern exerted a significant influence on global agricultural production, with weather extremes hitting key commercial producing regions across a number of sectors. The
Southern Oscillation index (SOI), a measure of El Nino / La Nina strength and duration, was strongly positive over the last half of the year, and in fact, this may be the strongest La Nina that we have seen since the 1973/74 event. The figure below highlights the intensification of the La Nina over the course of the year.The numbers on the perimeter show the day of the year, and the SOI is represented by the solid line; we can see that at the start of 2010, the SOI was in negative phase (-10.1, -14.5 & -10.6 for Jan, Feb & Mar 2010 respectively), but then a strong shift occurred during the El Nino – La Nina transition, and the year finished at nearly +27. Further, as the map above shows, the current equatorial Pacific Ocean Sea Surface Temperature (SST) anomalies are still negative, and while some La Nina indicators seem to be approaching a peak and then a return to neutral phase, the current event is still certainly not over.
Statistically, there are certain types of patterns that we can associate with a given La Nina or El Nino year; however, there is no typical event where all expected seasonal weather outcomes manifest themselves, so using this approach, or relying on analog years when attempting to identify potential seasonal impacts can be dangerous. Disclaimer notwithstanding, there are some general relationships that tend to hold up which are highlighted in this map from NOAA’s National Climatic Data Center. Some of seasonal relationships did verify, and also led to some of the food stories which are getting an increased amount of attention by analysts and traders at the start of the year. A few examples include: dryness in Brazil & Argentina (wheat), increased precpitation and flooding in eastern Australia (sugarcane), and a wetter summer pattern across the Indian subcontinent (sugarcane, pulses).
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In recent months, we have seen agriculture commodity prices exhibit a sharp rise in everything from coffee to natural rubber, and these higher prices have started to impact the margins of the producers, who more often than not, pass this along to the consumer. In an interesting article in yesterday’s FT , the author noted the following price changes (in %) of agriculture and energy commodities since January 1, 2010:
Remember that weather, particularly excess precipitation, will also affect the production cycle in the natural resources sector. As such, while impacts to agricultural interests are usually the first associated with an acute or extended adverse weather pattern, the energy and mineral sectors have weather exposure also. Further, with saturated fields and subsurface conditions present across much of the Queensland mining territories, there will not be a quick return to a normal production schedule after the heavy rains subside.
With the potential financial implications (and opportunities) abound as the mining sector deals with the effects of this pattern, we are seeing this concern reflected by the types of inquiries received within our own customer base at Weather Trends. Most of our clients in the commodity sector aim to act upon the relationship between weather and commodities in the ‘traditional’ sectors of energy and agriculture, but we have seen a marked increase in inquiries for forecasts and models relating the pattern to the broader natural resource extraction industries in recent months.
In a recent statement by the UN Food and Agricultural Organization, officials hinted at the potential for high prices to serve as a catalyst for food riots. As recently as 2007/08, riots broke out in three dozen countries across Asia, Africa and Latin America as a response to a strong and sustained spike in prices for staples including wheat, rice and oilseeds. However, for many food categories, the relative prices in this current regime have not equaled the highs seen three years ago. Also, while the negative impacts seem to get the most attention, growers in many origins are seeing better production and yields than they were during the season leading up to the riots.
So at the beginning of 2011, with our forecast in place, we are now developing and refining our commodity supply expectations for the year. Will the La Nina pattern remain in place to affect spring plantings and emergence for North America? If the pattern shifts back towards El Nino later in the year, what can we expect for Australia / AsiaPac? And how might a transition affect the onset of the Indian Monsoon? Finally, what do all of these factors mean for commodity prices in 2011? These are only a few of the many questions that we are attempting to quantify and provide to those with a weather risk to their operations or their portfolio. We should note here that the Weather Trends seasonal forecasts did anticipate most of the significant weather events over the past year, and made clients aware of the threats and opportunities underlying the weather risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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