How El Niño affects global crop prices

We are currently in a moderate El Niño that is likely to strengthen. There is a greater than 90 per cent chance that this weather event will continue through the 2015-16 northern hemisphere winter, according to the National Oceanic and Atmospheric Administration.

If it intensifies, it could be a significant catalyst for price gains in sugar, cocoa, wheat and maize, but it will reduce the price of soyabeans and coffee.

Brazil produces almost 45 per cent of the world’s arabica coffee and is nearing the end of its harvest. Last year’s drought is likely to have led to smaller than normal coffee beans, but this El Niño has led to a mild Brazilian winter, minimising frost damage.

What the harvest lacks in quality is likely to be made up for in quantity, which could drive prices lower. With the Brazilian real being so depressed, farmers have been offloading stocks into the international market, keeping supplies plentiful. We expect this currency pressure to remain.

Sugar has also been affected by the real’s weakness in the same way as coffee. In addition, production outstripped consumption for the fifth consecutive year in 2014-15, adding to excessive sugar stocks.

However, output is likely to decline in 2015-16, while demand is set to rise. Both the US Department of Agriculture (USDA) and the International Sugar Organisation are forecasting a production deficit for the first time in six years.

In contrast to coffee, an intensification of El Niño is likely to reduce sugar output and therefore raise its price. The weather event tends to reduce rainfall in India – the world’s second-largest producer – and the monsoon rains that started in June are almost 10 per cent below normal. The largely irrigated sugar cane in the country could suffer if water reservoirs are insufficiently filled in the monsoon, which provides more than 70 per cent of its annual rainfall.

Meanwhile, weaker-than-expected demand data for cocoa from North America and Asia in the second quarter of 2015 has outstripped the better-than-expected demand from Europe, driving the price of the commodity down in the past month. But supply concerns are likely to drive prices higher.

Cocoa growing is concentrated in Africa, which produces about 70 per cent of global output. El Niño has historically led to production shortfalls as it leads to drier spells in the continent during key growing periods.

The weather phenomenon affects grain crop development most during its reproductive growth phase. The Australian crop is about to enter this stage as the El Niño is intensifying, and it will most likely damage the harvest.

The USDA has revised its crop forecast for the US downwards, which has recently completed its 2015-16 harvest. But prices remain depressed because of a larger crop expected from the Black Sea region, while a disappointing Australian crop will lift prices and override this price weakness.

Maize in the US – the world’s largest producer – is in its reproductive growth phase and is sensitive to adverse weather. Historically, El Niños have adversely affected the country’s maize output, and a poorer crop this year could counter the bumper Brazilian second harvest that has just completed, driving price increases.

With Brazilian and Argentine soyabean harvests complete, the market’s attention is now on the US crop, which is in its reproductive growth phase. Brazilian soyabean production was at an all-time high, while Argentina’s output came close to last year’s record crop. The US’s 2015-16 production year is likely to follow suit and drive prices lower.

You may wonder why wheat, maize and sugar prices have been falling rather than rising in response to El Niño. It is true that the supplies are plentiful and existing stocks present a hangover, but this weather event should help tighten supplies looking forward.

Meteorological organisations were predicting an El Niño throughout 2014 but it did not materialise until this year. The market appears fatigued with gloomy production predictions, when in reality harvests have been strong.

This El Niño is unlikely to go away until spring 2016, though we are more likely to see the impact on crops now.

Nitesh Shah is associate research director at ETF Securities