Australia | Jun 02 2015
– Forecasters predict strong El Nino
– Upside Risk for soft commodity prices
– Downside risk for consumer earnings
By Greg Peel
A couple of weeks ago the Australian Bureau of Meteorology announced that El Nino thresholds had been reached for the first time since 2010, and would likely strengthen during the southern winter. The Japanese Meteorological Agency announced on the same day that El Nino conditions are present, and later the US Climate Prediction Center suggested a 90% chance El Nino will continue through the northern summer and an 80% chance it will last all through 2015.
El Nino, a weather phenomenon related to variations in ocean temperatures on either side of the Pacific, usually results in dryer than normal weather in South East Asia and Australia, warmer and dryer weather in South America and higher rainfall in western North America. Such adverse patterns pose a risk to wheat, sugar, coffee and palm oil production in South East Asia and Australia, to cocoa, coffee and sugar production in South America and corn and wheat production in the US.
The bottom line is a risk the prices of these commodities may rise due to limited supply. Whether or not farmers can benefit from higher prices would depend on whether they can successfully harvest a crop in such conditions or not. The more definitive risk of higher prices is to those companies reliant on grains and soft commodities as inputs to production. The food & beverage industry is a case in point.
The last El Nino event occurred in 2009-10 but proved to be weak. Forecasters are concerned this El Nino may prove to be a strong one, similar to that of 1997-98 which ushered in ten years of drought across much of Australia. Or maybe it won’t. El Ninos and La Ninas are notoriously flighty and difficult to accurately gauge.
Which is why Danske Bank analysts are advising consumers of soft commodities to hedge their input prices for the second (calendar) halves of 2015 and 2016. Danske expects grain prices to edge higher in coming years.
There may be some price relief, nonetheless, offered by current global stock levels. Danske notes that thanks to previously surging production, stock levels of soybeans, wheat, coffee and sugar in particular currently account for some 25-30% of annual consumption. Lost supply can be offset by stock drawdowns, thus alleviating price inflation.
By contrast, rapeseed and palm oil stocks are sitting only at around 10-12% of annual consumption. Given most of the world’s rapeseed is produced in Europe and Canada – two regions unaffected by El Nino events – an impact is unlikely. However dry weather for the rest of the year in South East Asia could significantly impact on palm oil pricing, Danske warns.
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