As anyone associated with agriculture knows, El Niño is a significant factor in the marketing of everything from rice to corn. The warm temperatures and variances in regional precipitation can boost or compromise almost any crop’s yield. Futures market fallout is often extensive, prompting proactive risk management by using weather trading strategies.
Although unique in degree and intensity, each El Niño system is a result of an extended warming of surface water temperatures in the Pacific Ocean. This warming generates an elongated Pacific jet stream that produces wet conditions in the southern U.S. and warm, dry weather in the north. If you’re a producer managing risk or an ag market speculator, staying abreast of the latest El Niño developments is essential.
Is 2019 Going to Be an El Niño Year?
Crafting weather trading decisions can be complex. It’s a bit more involved than tuning into the local 10-day forecast before sending orders to market. To properly diagnose the potential impact of a broader weather pattern like El Niño, it’s best to defer to the judgment of experts. The National Weather Service (NWS) and the National Oceanic and Atmospheric Administration (NOAA) are two organizations frequently consulted for all things weather.
December 2018 featured a rise in the sea surface temperatures of the Pacific, a strong indication that 2019 may pan out to be an El Niño year. According to the NWS and NOAA, El Niño has approximately a 65% chance of forming in the Northern Hemisphere during the winter season. It’s expected to affect North America throughout the spring months, although the NWS and NOAA project its severity to be only moderate.
For a more specific look at the current odds of El Niño, the International Research Institute for Climate and Society (IRI) at Columbia University issues a monthly report addressing the situation. An IRI update from January 10, 2019 assigned the following probabilities to an El Niño system being present for the first nine months of the calendar year:
|Months||Probability El Nino is Present|
|January, February, March||82%|
|March, April, May||66%|
|May, June, July||52%|
|July, August, September||44%|
In short, 2019 is expected to be an El Niño year. However, the environmental impacts are not projected to extreme and may dissipate as 2020 approaches.
What Does El Niño Mean to the Ag Markets?
Accurately predicting the weather a few days ahead of time is a tricky business, let alone weeks and months in advance. Assuming that the experts at the NWS, NOAA, and IRI are in the ballpark with their forecasts, what can we expect in the ag markets as 2019 unfolds?
Trading based on weather can be a delicate undertaking. Nonetheless, the North American ag markets have demonstrated historical tendencies with respect to El Niño cycles. Here are a few of the more well-known correlations, according to conventional wisdom:
- Rice: Increased precipitation for producing regions in California and the Southeast can create planting delays and lower yields. The harsh conditions have historically created higher pricing for rice futures.
- Wheat: For years that El Niño develops in the fall, wheat yields tend to be lower. The result is a weaker harvest and a bump in KC HRW futures.
- Corn: Midwestern weather patterns traditionally see more late-season rainfall in an El Niño year. This can promote strong corn production and pricing stability for corn futures.
- Soybeans: Wetter weather patterns for producing regions in the U.S. Southeast often boost yields. In much the same fashion as corn, soybean futures lag or exhibit pricing stability amid an El Niño cycle.
Just like any other market factor, the impact of El Niño can change on short notice. Atmospheric conditions are fickle at best, so estimations are linked to probabilities rather than to certainties. While generalizations and patterns are useful, they are by no means gospel.
Leverage Your Ag Trading
Risk comes in many forms, new and old. If left unchecked, any number of market drivers can undermine your bottom line.
One way of being prepared for the uncertainty climate issues present is by using weather trading strategies. For more information on how derivatives can help manage your risk profile, schedule a no-obligation consultation with a futures pro at Daniels Trading today.