El Niño has potential to disrupt the outlook for sugar, rice and other consumer staples

By Myra P. Saefong

Traders brace for weather impact on commodity prices

Weather has always been a key factor for many major commodities, and last month's arrival of the El Niño climate pattern has the potential to significantly disrupt the outlook for consumer staples such as sugar, soybeans, rice, and wheat.

"The El Niño story is big," said Darin Newsom, Barchart senior market analyst.

"We saw the effects of what it can do by watching Brazil's soybean and corn crops," he said. "A number of other softs markets have peaked and dropped back too." Softs refer to agricultural commodities that are grown, not mined like industrial metals.

In the U.S., the "jury is still out" on if the change in weather will be enough to improve crop yield, but "the world could go from struggling with a supply problem for a number of commodities to having too much supply, in some cases," said Newsom.

In early June the National Oceanic and Atmospheric Administration (NOAA) announced the arrival of El Nino and said it was expected to gradually strengthen into the winter. The climate pattern is marked by warmer-than-average sea surface temperatures in the central and eastern Pacific Ocean near the equator.

The climate phenomenon can lead to a range of impacts, including increased risk of heavy rainfall and droughts in certain parts of the world, said Michelle L'Heureux, climate scientist at the Climate Prediction Center, in a NOAA statement.

Droughts can lead to lower production for crops and pasture feed for livestock, while warmer weather in the winter can weaken demand for heating fuels such as natural gas, said James Roemer, publisher of WeatherWealth newsletter, who wrote about El Nino's impacts in a report published at the end of March.

By the winter, there's an 84% change of a "greater than moderate strength" El Niño and a 56% chance of a strong El Niño developing, according to NOAA.

Agricultural commodities, are "weather derivatives at heart," and therefore "intricately tied to the major weather pattern changes associated with El Niño and La Niña," said Newsom. La Niña is marked by a cooling of ocean surface temperatures in the central and east-central equatorial Pacific.

Sugar

The last strong El Niño occurred in 2015 to 2016, and the biggest impact was to sugar, said Jake Hanley, managing director and senior portfolio strategist at Teucrium Trading LLC. Prices for front-month sugar futures doubled between Aug. 31, 2015 and Sept. 30, 2016.

Production losses in India were the main culprit for that rise in sugar prices, as production there decreased by 25% from the 2014/2015 crop year through the 2016/2017 crop year, said Hanley, adding that at the time, India accounted for around 17% of the world's sugar production.

So far this year, prices for most-active sugar futures on the ICE Futures U.S. exchange settled as high as 26.66 cents a pound on May 10, FactSet data show. That was the highest since October 2011.

El Niño often affects soft commodities the most, such as sugar and cocoa in West Africa and Southeast Asia, said James Roemer, publisher of the WeatherWealth newsletter. A drought in Brazil, floods in India, and strength in the Brazilian currency -- the real -- contributed to this year's rally in sugar, he told MarketWatch earlier this year.

Read my story published in April:Orange-juice futures are near a record. Sugar is at an 11-year high. And coffee is peaking too. What's going on?

Sugar prices may have "further upside depending on El Niño's length and severity," according to Hanley.

The weather pattern may also impact coffee and other commodities, he said, pointing out that crops like warm weather, but not too hot, and rain, but not too much rain.

A map from NOAA's Climate.gov below shows the different temperature and precipitation "anomalies" associated with El Niño, he said.

Other crops

In the U.S., El Niño is "typically a good thing" for so-called row crop farmers -- corn and soybeans, primarily, said Hanley.

His colleague Sal Gilbertie, chief executive officer at Teucrium Trading, said warmer weather in the U.S. would bring rain and more production, "so depending on the lingering effects of the springtime dryness in much of the U.S. growing belt, we would expect rainfall amounts to increase and improvement in crop conditions."

More production could pressure prices for soybeans, which trade lower year to date. Most-active soybean futures traded in Chicago settled as low as $12.65 a bushel this year on June 28, the lowest since December 2021, according to FactSet.

The market has already seen the effects of El Niño on Brazil's soybean and corn crops, said Barchart's Newsom, with the U.S. Department of Agriculture showing increases in 2022/2023 Brazil crop production estimates for both commodities in a July 2023 report, from initial estimates released in May 2022.

"It all has to do with better moisture and more moderate temperatures associated with El Niño," Newsom said.

The weather pattern also has potential to negatively impact wheat and rice production in key growing areas such as India.

India, which is the second-largest single country producer of both rice and wheat , consumes nearly all the wheat it produces, said Hanley. If there's a production shortfall, India may look to import wheat, potentially putting "a strain on a volatile market," with wheat still very sensitive to headlines out of the Black Sea resulting from the war in Ukraine. The Black Sea Grain Initiative, which helps facilitate exports from Ukrainian sea ports following the Russian invasion of Ukraine in 2022, is set for renewal on July 17.

India also accounts for 40% of global rice exports and production losses there can have significant impacts on the global rice trade, Hanley said. On Thursday, Bloomberg reported that India is considering banning exports of most varieties of rice amid rising domestic prices.

This year, most-active rough rice futures settled as high as $19.665 per hundredweight on June 12, the highest since June 5, 2020.

Production declines for wheat or rice may lead to "increased demand for the other, and lead to higher food prices for consumers across the globe," Hanley said.

All in all, El Niño events "aren't all created equal," he said. "You've got your heavy hitters like the one in 2015-2016, then there are the moderate and weak ones."

"Length and severity both matter, and it looks increasingly likely that we're about to experience another strong El Niño extending into 2024," he said.

-Myra P. Saefong

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07-15-23 1356ET

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