El Nino Peak Has Weather Forecaster Warning of La Nina
Comment of the Day

January 05 2016

Commentary by David Fuller

El Nino Peak Has Weather Forecaster Warning of La Nina

Here is the opening of this interesting article from Bloomberg:

The El Nino that disrupted weather worldwide last year has peaked. Now forecasters are predicting what may be next for the world’s climate.

A number of El Nino-Southern Oscillation indicators suggest that the 2015-16 El Nino has peaked and weather models predict it will decline in coming months, Australia’s Bureau of Meteorology said on its website on Tuesday. Conditions will return to neutral during the second quarter with a chance of La Nina in the second half of 2016, it said.

La Nina is a cooling in the equatorial Pacific Ocean, sometimes thought of as El Nino’s opposite. The two are extreme phases of a naturally occurring cycle, according to the National Oceanic and Atmospheric Administration. Based on the 26 El Nino events since 1900, about 50 percent have been followed by a neutral year with 40 percent by La Nina, according to Australia’s weather bureau.

“Neutral and La Nina are equally likely for the second half,” the bureau said. A repeat of El Nino is the least likely outcome, it said.

The current El Nino is rated as one of the three strongest since 1950. The warming of the equatorial Pacific changes weather worldwide, bringing drought to parts of Asia while the southern U.S. can get more rain. Its effects helped palm oil cap its best year since 2010, while sugar posted its first annual gain in five years.

La Nina can also roil agricultural markets as it changes weather. A large part of the agricultural U.S. tends to dry out during La Nina events, while parts of Australia and Indonesia can be wetter than normal. Citigroup Inc. has said that a transition to a strong La Nina may present significant upside potential for grains price volatility.

David Fuller's view

The weather outlook is even more uncertain that stock markets, in my opinion, but the sentence that most grabbed my attention is the last one above.

If you believe in climate change, then there is an argument that increased rainfall will be more beneficial than harmful for agricultural commodities, on average.  However, if you do not believe in climate change, then you may be more interested in the recovery potential of currently depressed grain prices. 

If the paragraph above sounds glib to you, then I will reintroduce the more fundamentally important point: better farming techniques – from higher yielding seeds to fertilizers and mechanised farming – have more often than not exerted downward pressure on agricultural commodity prices over the last two centuries.

Viewing the staple grains - from Corn to Wheat, Soybeans and Rough Rice – on 50-year charts we see that the first three are trading at reasonably depressed prices, considering that there is no adjustment for inflation.  However, they are still weak, which should make them even more interesting if we eventually see even lower prices.  Rough Rice is the exception in that it saw a sharp rally between last May and October, now partially retraced.  Seasonally, this is a quiet period for grains, but they are likely to be of further interest in 2Q-3Q 2016. We should keep an eye on them.  

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