As weather patterns continue to astonish the world, a term frequently thrown around in the meteorological arena is “El Niño.” With the recent announcement from the World Meteorological Organization (WMO) highlighting a 90% probability of El Niño continuing through the latter half of 2023, questions arise on its implications for commodities. Let’s dive into understanding the phenomenon and its consequential ripple effect on global commodities.
Understanding El Niño
The El Niño Southern Oscillation (ENSO) is a pivotal oceanic-atmospheric event rooted in the irregular variations of surface water temperatures in the Central and Eastern Pacific. In simpler terms, it is a dance between two phenomena – La Niña, bringing colder, wetter weather, and El Niño, ushering in warmer, drier climes. As El Niño gathers momentum, it redistributes warm water and subsequently, evaporation and rainfall. This results in regions like southeast Asia and Australia becoming drier, while areas such as Peru and Ecuador see an uptick in rainfall.
Figure 1: El Niño climate impacts December – February
Climate Impact: An Overheated World
This year, the repercussions of El Niño have been glaring. With vast areas in the Northern Hemisphere grappling with sweltering heat and unprecedented rainfall, July 2023 stands as the hottest month on record. China’s temperature scales toppled, the US sweltered under relentless heatwaves, Canada’s wildfires became historically rampant, and the Mediterranean didn’t fare much better.
Decoding Commodities Under El Niño’s Watch
Figure 2: Price impact on agricultural commodities over the historical El Niño cycles
Agricultural commodities are invariably intertwined with weather patterns, with El Niño acting as a catalyst for some and a detriment for others.
1. The Rise and Rise of Soybean Oil: With the onset of El Niño, palm oil supply often sees a dent, and this year, nearly 40% of Indonesia’s oil palm areas reported below-average precipitation. This deficit in palm oil supply invariably pushes demand towards alternatives like soybean oil, a trend compounded by geopolitical unrest in regions like the Black Sea.
2. Rice in the Crosshairs: As dry spells loom over Thailand, a significant rice exporter, farmers are advised to curtail their planting activities. With India, the leading rice exporter, implementing bans on certain rice exports, the ripple effects might propel wheat, another staple, into the spotlight.
3. Cocoa’sLining: El Niño has historically parched West Africa, a hub for cocoa cultivation. The arid conditions, coupled with issues like black pod disease prevalent in major producers like Ivory Coast, Ghana, and Nigeria, pose threats to cocoa output. With the market potentially witnessing its third consecutive year of deficit by 2023-24, cocoa prices are poised to receive a boost.
While the full might of an El Niño event remains shrouded in uncertainty, its intersection with geopolitical disturbances amplifies concerns. With stockpiles of key commodities like wheat, corn, soybean oil, and cocoa trailing behind their 5-year averages, any disruption in production can cause significant market volatility. All said and done, El Niño seems geared to be a defining factor for agricultural commodities in the foreseeable future.
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