El Niño Is Back! Watch Out For Its Impact On The Agriculture Sector In China

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Includes: ADM, BG, CORN, SOYB, SPGSCT, WEAT
by: Bill Liu
Summary

Climate models indicate that the El Niño weather pattern could last from spring into summer in 2019.

The weather pattern in China could repeat what happened in 2016: flood in the south and drought in the north.

Rapeseed, winter wheat and corn in China are more directly affected. Cotton and soybean are also facing increased risk of production downgrade.

Commodity trading firms could benefit from the agri-products rally.

According to the China National Climate Bureau press conference on March 25th, meteorologists of the government bureau warned that the 2019 climate risk could be high for China, with a larger chance of drought, flood and other extreme weather events for the incoming crop season (ource:CCTV). Some experts warned that the weather pattern could be similar to that of year 2016 when El Niño was strong.

Source:Commonwealth of Australia 2019, Bureau of Meteorology

The experts had estimated that El Niño, which had formed back in September 2018, will keep strengthening into the summer of 2019 and could last into winter. And with its effect on atmospheric circulation, China could experience a colder spring and following by a hotter summer. The temperature could be more volatile. The precipitation pattern across the nation could repeat the pattern of 2016, which was defined by drought in northern China and flooding in southern China.

Source: NOAA

The extreme weather events actually had already shown up in China since the start of year 2019 and taken some toll on the winter crop. From February to March, southern China had experienced excessive precipitation and as the growing area of rapeseed is mainly located in southern China, there’s the potential production risk of rapeseed being harmed by the rain, flood and low temperature. This is particularly the case given that this is all happening near the harvest season of the winter rapeseed in April and May. The rain belt is also moving northward, deep into the core of the growing area around the middle and lower reaches of the Yangtze River. The price of rapeseed meal futures in Zhengzhou Commodity Exchange had already climbed about 7% in March alone, reflecting the market concern of loss of production of rapeseed.

Source: USDA and CMA

Besides rapeseed, another crop which could be harmed by excessive precipitation brought by El Niño is cotton, which is entering the growing season in the early spring. The flood in 2016, which led to delay of both growing and harvesting of cotton crop, caused a 5% drop in production of cotton compared to 2015 and a 50% price increase from March to July 2016. If history repeats itself, investors and producers should be prepared for the threat from the weather side on their cotton crop.

Source:USDA and NOAA

In contrast to too much rain in the south, northern China, which is the major growing area of winter wheat, corn and soybean, has already suffered from drought. The degree of drought for now is even more severe than that of 2016.

Source: CMA

Though it’s still too early to forecast whether the current drought in northern China could expand further into the critical growing months of the summer, we can closely watch how it can affect winter wheat, which is in the heading stage. The price of futures of winter wheat in Zhengzhou Commodity Exchange had already risen about 6% since March.

Source: USDA

Besides winter wheat, the current drought situation is more of a threat to corn than soybean. For corn, the growing area in China is more concentrated in the regions which are now affected by drought. And the growing area of soybean is more concentrated in the further north of China. A growing delay of corn for now is very likely. But for soybean, there could be some advantage of intentionally switching from corn to bean, if the drought situation improves from spring to early summer.

Source: USDA

To sum up, the current El Niño weather pattern in China presented more threats to rapeseed, winter wheat and corn, which had already been reflected in their price moves. And if the current pattern persists, we should add more weather premium into the prices of cotton and soybean, to price in the possibility of a production downgrade.

And with the increased odds of a bullish trend of agriculture products into summer, we should also put the commodity trading firms such as COFCO, ADM, Bunge, and Louis Dreyfus, which can benefit from a rally in these commodities, back on our watchlists.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.