El Nino persists as major crop influence worldwide

by Teresa Acklin
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   Summary of El Nino-related worldwide weather developments and outlook

Jon B. Davis, Smith Barney, Chicago

   Worldwide crop production disruptions from El Nino have been about what could be expected to result, given its intensity, according to Jon B. Davis, first vice-president and meteorologist at Smith Barney, Chicago, Illinois, U.S.

   At the same time, Steven A. Freed, director of research, ADM Investors, Inc., Chicago, suggested that El Nino has created little sense of immediate urgency in grain and soybean markets.

   El Nino is a worldwide weather phenomenon associated with rising surface water temperatures in the Pacific Ocean. Historically, El Nino years are associated with reduced crops in Australia and eastern Asia.

   Mr. Davis in September described this year's El Nino as “phenomenally impressive.” “Even if ocean temperatures warm just a little more, we will reach or eclipse the El Nino levels of 1982-83, which was considered the El Nino of the century,” he said at that time. In the intervening period, water temperatures in the Pacific have climbed further, Mr. Davis said. Temperatures in early December in the eastern Pacific were up 3.9° Centigrade from normal, he said, compared with 3.6° in October and 3.2° in September. In 1982-83, the water temperatures peaked at 3.6° warmer than normal. “It was very obvious that this was going to be one of the strongest of the century, and right now this is the strongest of the century,” he said.

   Weather developments worldwide in recent months have been highly consistent with what would be expected in a strong El Nino year, Mr. Davis said. In North America, he said, “Everything has gone exactly like it should have gone. It was cold in late October and early November, and then the jet stream went into what we call a split flow pattern. There are two jet streams, with the northern one locking cold air in northern Canada. The southern branch is very strong and races across southern California and across the southern United States, bringing very wet weather to much of that region. We have had wetness in Texas and wetness in southern Florida. From the standpoint of the U.S., everything has gone almost perfectly on script.”

      Less impact in Australia.

   One area where the impact of El Nino has not been as severe as feared is Australia. In recent months, wheat production estimates there have been raised steadily because the impact of El Nino has been less dramatic than expected. “In Australia we had timely rains, just when drought was becoming a problem,” Mr. Davis said. “Now it is a question of the summer crops — especially cotton — and how they will develop. We've had problems, but they haven't been that severe. Going into the heart of summer, we will see what kind of patterns will emerge. With an El Nino this strong, you can't ignore Australia.”

   In Argentina and Brazil, the El Nino has created its expected effect — wetness. “The bias during any El Nino in southern Brazil and Argentina is wetness, and we have been very wet,” he said. “If there is going to be a problem in El Nino years in this area, it is with planting. And we did have some planting problems in early November, but farmers had a window of opportunity with two weeks of dry weather, and that allowed their crops to go into the ground. Argentina didn't have any planting delays.

   “Once the crops are in, the chances of a problem are quite low, so there is not much trouble to be looking out for. Prospects are fantastic.”

      Problems in South Africa.

   The bias in South Africa is toward heat and dryness in El Nino years, which is exactly what has developed in recent months, Mr. Davis said. “It has been especially severe in the western half of their maize triangle. That area has really gotten hurt, and I don't see any improvement for the time being. The eastern half of the maize triangle is much better. They have had timely rains. The overall outlook is still pretty poor. It will be very important into early February as the maize crop goes into pollination.”

   As in Australia, the wheat crop in China has benefited from timely rains. Still, the winter wheat crop entered dormancy in “average to poor shape,” Mr. Davis said. Conditions would have been much worse but for much needed showers in late October and early November that helped the crop achieve some growth before dormancy. “There isn't much to watch until March, but there are problems with irrigation reserves. When the crop comes out of dormancy, it will need precipitation fast.”

      ‘Weird' pattern in India.

   One of the more unusual weather patterns has emerged in India, Mr. Davis said. “It has been very weird in India, very wet,” he said. “When the monsoon retreats in late September, it will usually be completely dry there. You may go months without a drop of rain. But it has been wet all fall, and that has affected the quality of harvested soybeans. I never expected anything like this.

   “Because they count on dryness, they often pile soybeans on the ground, which leaves it susceptible to quality deterioration. I expect a continuation of the wet weather, which could mean more problems.” Turning back to North America, Mr. Davis said that the winter wheat situation was excellent. Good weather allowed the crop to establish itself well, he said. “There is no bias toward extreme cold in this area in El Nino years, so chances of severe winterkill are low,” he added. “Moisture levels in the spring should be very good, especially in the Plains.”

   Mr. Davis would not predict a repeat of the severe maize crop losses that occurred in the summer of 1983. “Conditions this spring and summer will depend on changes in water temperatures and other parameters,” he said. “Getting a real feel on what will happen more than three or four months away is very difficult.”

      Diminished market excitement.

   While El Nino created considerable excitement in grain markets in the fall, much of this agitation has dissipated in the last few months, Mr. Freed said. “The potential was there for El Nino to be bullish, but we ran into an economic buzzsaw of South Korea and Japan, where there were failures of good, sound companies,” he said. “We don't really know if that's over or if there are going to be more failures, or how long the problems in South Korea are going to last. It's a blow to demand.

   “Plugging that back into the formula, El Nino takes a back seat in markets. The large speculative funds have liquidated their long El Nino maize positions and they are now short wheat and short soybeans.” Mr. Freed said that the market's reaction does not mean that El Nino has not had an impact on crops. “I think that for the most part, El Nino is staying the course. You are getting good weather in Brazil and the southern U.S., and dry weather in the northern U.S., all of which is very El Nino-ish. We also have drought in South Africa. Again, typical El Nino. Right now, you'd have to say that the El Nino characteristics are fairly strong, but most of these things are bearish.”

      Southeast Asia a distraction.

   “What little bullishness we can pull out of South Africa is being offset by what's happening in southeast Asia,” Mr. Freed said.

   Even if a drought is impending in the U.S. maize region in 1998, the market impact probably may not be significantly recognized until mid-summer, Mr. Freed said. “In 1983, which was the last strong El Nino year, maize prices were cheaper than today as late as July, when the big rally began,” he said. “I still don't think there is a matter of urgency, even if El Nino is detrimental to U.S. 1998 maize, soybean and spring wheat yields.

   “My belief is that from a risk/reward standpoint, you still need to pick a spot where you want to buy these commodities. Seasonally we tend to make bottoms around this time of year. Sometimes it is February in soybeans because of the South American crop. If El Nino is going to be bullish, we are getting to a point of very attractive prices. But I don't think we have to worry about it for awhile.”