CANE - El Niño's Impact On Commodities And The Coming Easing Of The Midwest Drought

2023-06-28 04:51:20 ET

Summary

• How El Niño can affect commodity markets.
• El Niño's most bullish impact has thus far been in the cocoa and natural gas market.
• Video on how I predicted quite early, some improvement coming for the Midwest drought for corn and soybeans.

El Niño, a fascinating weather phenomenon occurring irregularly in the equatorial Pacific Ocean, can have significant implications for global weather patterns and, consequently, influence commodity markets. When it comes to El Niño's effects on commodity markets, predicting outcomes is not always straightforward. However, there are a few general mechanisms through which it can potentially create a bullish trend in commodity markets, and I'd be happy to shed some light on them. Right now, however, we are seeing many Agricultural markets enter bearish (not bullish) trends.

The two exceptions are in the cocoa market ( NIB ) and natural gas ( UNG ) which are seeing higher prices due to flooding in West Africa (cocoa) and record global heat in Europe and the southern United States which is increasing demand for natural gas and for LNG exports overseas. Here is an article I wrote about the climatic factors that will influence the cocoa market.

In the realm of agriculture and food commodities, El Niño can introduce abnormal weather conditions, such as increased rainfall in certain regions and drought in others. These conditions can profoundly impact agricultural production and crop yields. For instance, excessive rainfall can lead to flooding and crop damage, resulting in reduced supply. Conversely, drought can cause decreased crop yields and lower harvests. These unexpected supply shocks can subsequently drive up prices for commodities like grains, vegetables, fruits, and other agricultural products.

Corn ( CORN ) and soybean ( SOYB ) prices soared earlier this month because of the worst Midwest drought since 2012 and the third worst since the dust-bowl days of the 1930s. However, 75% of all El Nino events result in more decent summer weather. Hence, I have been preaching for three weeks to my newsletter clients that the drought would ease somewhat in July. Hence, corn and soybean prices may have already seen the summer highs. Here is a video I did recently explaining why I disagreed with other weather forecasters that this Midwest drought would last all summer.

Anyway, the influence of El Niño extends to energy markets, particularly those linked to hydroelectric power and natural gas. In regions where hydroelectric power generation holds significant importance, such as South America, reduced rainfall during El Niño can lead to lower water levels in reservoirs, ultimately reducing energy production. As a result, there might be an increased demand for alternative energy sources like natural gas, which can push up prices in the natural gas market. No question, the barrage of storms out west last winter has replenished hydro-power supplies for the west. However, the combination of El Niño and Climate Change, which has brought ocean temperatures to the brink of a global disaster is responsible for the extreme heat in Europe, once again.

El Niño's impact can also reverberate in metals and mining industries. By triggering heavy rainfall and flooding, El Niño can impede access to mining sites, disrupt supply chains, and hinder the transportation of extracted minerals. These disruptions can lead to reduced output and potential supply shortages, thus driving up prices for metals and minerals.

Moreover, El Niño can exert secondary effects on various commodity markets. For instance, alterations in weather patterns can impact shipping and transportation, potentially influencing the prices of commodities transported by sea. Furthermore, El Niño's influence on ocean temperatures can affect fish populations, consequently impacting the seafood market.

It's important to note that while El Niño can create bullish conditions in commodity markets, its impacts are not universally uniform or guaranteed. For example, for more than two weeks I became bearish on coffee ( JO ) and sugar ( CANE ) due to a huge net long position in the market and much-improved weather for the Brazil harvest. While El Nino could disrupt sugar production in India and Thailand later this summer (#2 and #3 producers, respectively), currently, it is this dry weather that is influencing these two commodities. Notice, for example, my BestWeather spider becoming bearish coffee two weeks ago because of the dry Brazil weather and lack of a frost scare. It is rare to see frost scares in Brazil during El Nino. Hence, 80% of the time, coffee prices go lower during the Southern Hemisphere winter. Come their summer, it may be a different story.

Conclusion:

The severity and duration of El Niño events can vary, and other factors such as global economic conditions, geopolitical events, and government policies can also exert their influence on commodity prices. Hence, when analyzing commodity markets, it becomes crucial to consider a wide range of factors to gain a comprehensive understanding of the situation at hand.

Nevertheless, El Nino could have a bullish impact on some commodities later this year, such as cocoa, sugar, and wheat ( WEAT ). Again, it is the natural gas ( BOIL ) and cocoa markets that are currently seeing bullish effects from El Nino. However, if you expect to see soaring corn, soybean, and coffee prices anytime soon, I do not see that happening.

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