Ocean warming affecting markets

by Drew Lerner
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Aggressively warming eastern equatorial Pacific Ocean temperatures are reshaping 2016 commodity markets from the Americas through southern Asia to Africa. A general trend change in weather is responding to the rising ocean temperatures in the Pacific Ocean. Old weather trends are disappearing and new areas of concern are evolving.

Most signs of drought that prevailed in the southern U.S. Plains for four to five years disappeared this spring. Record rain in May for the southern U.S. Plains ended drought for the region and brought on significant flooding. Concern over poor soil moisture in late winter quickly abated and new worries over wet weather disease, harvest delays, protein declines and grain quality replaced them in wheat production areas.

The Canadian Prairies had also been stuck in a wet weather rut for much of the past five years. Year after year of excessive rainfall, soggy field conditions and reduced plantings occurred until this spring when the rain making machine was finally idled. The sudden change in the Canadian Prairies weather brought celebrations for a few weeks with producers almost dancing in the fields over the lack of rain. Six weeks later the party was over as many spring and summer crops struggled to emerge and establish because of little to no rain.

Today’s weather patterns in North America are still flipped around from those of last year with Canada’s Prairies still dealing with dryness in many areas while the U.S. southern Plains and lower Midwest are excessively wet. Many will attribute these changes to the infamous evolution of El Niño which has occurred aggressively in recent weeks by raising equatorial Pacific Ocean temperatures between the International Dateline and the coast of South America. It is amazing what a few degrees of warming can do in an Ocean thousands of miles removed from land and agriculture, but its impact is real and will be prevailing through the balance of this year.

Canola futures prices jumped through key resistance in late May and early June when the impact of dryness and frequent frost and freezes became significant in Canada while at the same time Australia was dealing with El Niño-induced dryness. Similarly, wheat futures prices jumped up during the record-setting May rain in the U.S. Plains and concern about Australia and Canada production was running high. Since then conditions have mellowed out a bit, but concern remains in the background of daily trades.

Impact is worldwide

The impact of El Niño does not start and stop in North America. It has a worldwide influence and the past few months have brought changing weather conditions to many areas. Australia agriculture producers feared El Niño through nearly all of 2014 as forecasters got the outlook for El Niño seriously wrong on two different occasions. The forecast for one of the most intense El Niño events on record was issued by some authorities in the spring and early summer of 2014 only to be followed by El Niño like conditions for a while and then a return to neutral ENSO conditions. A second forecast for El Niño was released in late summer and early autumn of 2014 and that too failed to materialize except for a small pool of very warm water near the International Dateline. That pool of warm water was not a traditional El Niño, but it brought worsening drought conditions to California and a cutoff in rain for months in the Philippines. The phenomenon was dubbed “Modoki” El Niño which means “similar, but different” in the Japanese language.

“Modoki” conditions disappeared over several weeks in May and early June and was replaced by a legitimate “traditional” El Niño event. Sea surface temperatures have been aggressively warming between the International Dateline and the coast of South America since then. The changes in ocean temperatures have changed the amount of water vapor that enters into the atmosphere from that water body and created a huge low pressure center that has weather pattern changes occurring around the world like an aggressive domino effect.

Philippines drought has been greatly relieved by the development of rain in recent weeks. Much of the precipitation is needed before the nation is freed from extremely dry conditions and a production cut for rice, sugarcane, corn, tea, rubber, coconut, coffee, cocoa and huge number of other crops. El Niño is still present and so are some of the moisture deficits that hurt production.

Indonesia and Malaysia sidestepped dryness and multiple forecasts for drought during much of 2014, but may now be headed into a period of quite stressful dryness and warmth. The environment will eventually threaten sugarcane, coffee, cocoa, tea, rubber, corn and oil palm.

Rice and sugar may be the two commodities that are most impacted by this year’s change in ocean temperatures brought on by El Niño. Rice futures prices had been in a freefall for a very long time brought on by huge stockpiles in storage and big production years. There have been some production issues from time to time, but no routinely occurring event stands to have as much impact on the futures market for rice than El Niño. El Niño events reduce rain in the Philippines, Indonesia, Malaysia, Vietnam, Laos, Cambodia, Thailand, India, Central Africa, Central America and many of the northern countries in South America. Because of the threat of reduced rainfall in each of these areas there is little support for the futures market. News of El Niño development has brought a halt to the fall in world rice prices and because there is a threat of production cuts a floor seems to be in place under prices restricting a further fall. The market place, traders and producers are looking for El Niño to cut into supply by reducing production. However, over the years through genetics, rice – just like many other crops – has been bred to perform better in extreme weather conditions. It will take a large calamity to seriously reduce production, especially in years like this one when El Niño does not evolve in a traditional manner and its impact on output may not be as severe as feared.

Much of the news media has hyped up this El Niño event to match those events in the past that had horrific impacts on agriculture. Past El Niño events have been serious enough in Indonesia and Malaysia to darken the sky in smoke from forest fires resulting from extreme dryness. Parts of India have endured quite a few El Niño-driven droughts of significance and that too has the media a bit excited, but every El Niño is different. Memories of disastrous El Niño years of the past have allowed media groups to alter the market psyche into fearing the worst when it comes to El Niño. The reality of it all will become evident in a few weeks and months, but World Weather, Inc. anticipates the impact of this year’s El Niño to be milder than feared.

There will be rainfall shortfalls and regions of warmer and cooler weather. Rainfall will be below average in many southern Asian countries and across Central America, northern South America and central Africa, but the manner in which this El Niño has evolved (from “Modoki” conditions) will likely mellow out some of the impact and traders should be ready to look back at the end of this year and say, “gee, that El Niño was not so bad.”

Production cuts will likely be mild and the impact on futures market prices and general supply of fresh agriculture commodities will be less dramatic than predicted.