Keeping a close eye on the United States

by Drew Lerner
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World weather remains dominated by El Niño, but forecasters are suggesting that the event has reached its peak intensity and that opens the discussion for what happens next. There is a good chance that as El Niño diminishes in the first and second quarters of 2016, mostly improved weather will impact many of the world’s most important agricultural areas.

Today’s most serious problems are in Indonesia where drought has been at an extreme for several months and will only slowly ease in the next few weeks as seasonal rainfall attempts to evolve. The delayed arrival of season rainfall culminates a normally “drier” season with critically low soil moisture and water supply.

Drought in Indonesia is probably among the worst in the world presently, but many other areas are drier than usual. Portions of Northern Brazil, Central America, Central Africa, Europe and Australia suffered from dryness during a large part of 2015, and each of these areas has either seen recent improvement or will soon see such conditions.

It is a little rare for improvement to come so soon during a record or near-record intense El Niño, especially with it still at its peak intensity. Most computer forecast model runs have been suggesting El Niño will remain at its peak intensity for several more weeks before showing a more accelerated decline in intensity and influence on world weather patterns. So, what does that mean for 2016?

We live in world of equilibrium. Nature must stay balanced, and when extremes of any kind occur there tends to be an equal and opposite effect. Prolonged periods of unusually hot weather are quite often followed by some impressive cool weather. Years that are snow-free or receive well below average snow are often followed by greater snow years. The same is true for dryness and extremely wet conditions. The record books are full of examples of this and all that is needed in most extreme weather situations is a little time for the balancing to take place.

The end of El Niño promises to counterbalance many of the abnormalities noted this year. World Weather, Inc. is expecting Europe to see a cooler and wetter summer in 2016 for reasons other than to counterbalance this year’s hot and dry bias. Some of the wetter and cooler conditions will also impact the western Commonwealth of Independent States. Recent forecasts have been predicting more abundant rain in eastern Australia in the next few weeks and some slowly improving rainfall is now advertised for Indonesia and northern Brazil.

As time moves along and El Niño weakens more significantly, these trend changes will become much more noticeable. A quick review of past significant El Niño events nearly always shows a significant return of rain to southern Asia and most tropical areas of the world, and 2016 will be no different. Confidence is very high that many of this year’s drier-biased areas that suffered production cuts will be wetter. Grain and oilseed crops, including rice, corn, soybeans and some canola, will likely experience better environments for production in 2016. The same may be true for sugarcane, coffee and cocoa production.

U.S. often trend drier after el niño

If these forecasts are all correct, one must conclude that world production of many agricultural commodities will rise significantly during the year, pressuring futures prices. That may be true, but interestingly there is enough support to believe the United States may hold a “trump card” for commodity futures prices in 2016.

Futures trading first began in the U.S. and it still holds much of the trading volume each year, although conditions are slowly changing in other places around the world. What happens in U.S. crop areas often has a direct impact on world commodity trade, and 2016 will likely be more that way than usual because of the already favorable weather that is expected around the world in 2016 as El Niño diminishes.

The U.S. weather is dictated by many repeating trends in the atmosphere. One is the repeating cycle that appears in the upper atmosphere at roughly 18-year intervals. Another is the El Niño phenomenon and both of these trends are pointing toward some level of drier biases in 2016. The 18-year cycle suggests less than usual rainfall from the lower Midwest and southeastern states through the lower Mississippi River Basin to the southern half of the Plains. The pattern also suggests a warmer bias.

While El Niño’s demise in many tropical areas around the world usually means more rain, the U.S. weather often trends a little drier, especially following extremely strong El Niño events like that of 2015. In most cases, very strong El Niño events are followed by La Niña, and La Niña events remove rain from the U.S. weather patterns. La Niña also produces some warmer tendencies in the U.S. Midwest.

Statistically speaking, the U.S. wet weather bias that occurred in the spring of 2015 in the southern Plains and lower Midwest was the most significant since 1936. Summer 1936 was not just dry, but it became the second driest year on record following the 1934 drought and held that position for a very long time.

The combination of a drier bias already expected in the southern United States from Texas, Oklahoma and Kansas to the lower Ohio River Basin and southeastern states in 2016 could be exacerbated by La Niña (if one occurs), making the 1936 widespread dryness issue a perceivable possibility next year. Now, history does not repeat itself exactly and another 1936 seems a little too extreme to be predicting here, but a drier and warmer bias is more likely than a wet one and could still have some influence on commodity trade in 2016.

No one thought 1934 would occur again in the same manner but then along came 2012, and sure enough, the drought that year looked ominously like that of 1934. Big droughts like those of 1934, the early 1950s and the middle 1980s rarely occurred as single-year events. There was usually another significantly dry year accompanying the single events of intense dryness. So where is the other year of dryness to go along with 2012? Will it be 2016? Or perhaps ongoing dryness in California and the multi-year drought in the southern Plains may have already verified the drought cluster theory. But what if our 2012 drought has not yet seen its compatriot?

These drier tendencies for 2016 that are already built into the forecast patterns makes the year one that should be closely monitored for drought. World Weather, Inc. is not ready to make wild projections of calamity in 2016 because of dryness, but it does make the point that with the rest of the world already expecting much improved weather in 2016, perhaps only the U.S. holds the wildcard that could pump up 2016 futures prices on a whim that dryness might be a threat.

Most forecasters that tout big droughts of devastating proportions fail to see their forecasts verified and they disappear from the public eye as quickly as winter snow abates in the spring. So do not misinterpret this forecast. No one is predicting calamity for 2016 and no weather forecaster has the inside track on making such predictions.

But it does not take a rocket scientist, or in this case a meteorologist, to suggest that the U.S. weather in 2016 will likely influence the commodity markets around the world, because it usually does. However, watching the events in 2016 unfold will be worthwhile by any savvy grain or oilseed trader to be first to take advantage of the potential rise or fall in futures prices before anyone else. Certainly, if the U.S. does not slip into a drier weather mode in 2016, the pressure is likely to be downward on futures prices – just based on statistics for years following El Niño. Greater rains will bring greater production and lower prices unless some major production region, like the U.S., runs into a production issue.