Traverse City Record-Eagle

Business

April 26, 2014

Futures File: Warming water and commodities

Global farmers, fishermen, meteorologists and commodities traders are closely watching water temperatures in the South Pacific, waiting to see if the water will warm up this summer — a telltale sign of the El Niño phenomenon.

According to the U.S. Climate Prediction Center, there is a roughly 65 percent chance that the climate pattern will develop, which could bring extreme weather conditions around the world. The last major El Niño event was in 1998.

Typically, El Niño brings drought to Australia, Asia, and West Africa, which can wreak havoc on their commodity production, hurting those regions’ output of a wide range of commodities, including wheat, rice, coffee, and cocoa.

Meanwhile, an excess of water could get dumped on Central and South America, interrupting the production of their crops. Most noticeably, flood conditions could strike in Argentina, the world’s third-largest bean grower, severely hampering soybean output.

Impact on the United States

For American Midwestern farmers, El Niño typically leads to a slightly cooler and wetter summer, which can help to produce bin-busting corn and soybean crops. Due to a potential South American grain shortfall, US farmers could have a large crop that would command high prices on the global market.

Southern U.S. states may also benefit under El Niño as the climate pattern can produce high winds across the Caribbean, then break up Atlantic hurricanes. For commodities watchers, hurricanes are especially impactful on the energy industry, as there is significant oil and natural gas production in the Gulf of Mexico and refineries on the Gulf Coast that can be interrupted by hurricanes. Should El Niño develop this year, those industries may be spared major storms this season, helping to keep energy prices lower.

Impact on prices

Overall, El Niño could prompt sharply higher prices for many agricultural commodities, which are already being seen in some of the markets. Coffee and cocoa prices are already trading near two-year highs, valued currently at $2.07 per pound and $2,941 per metric ton, respectively. Meanwhile, soybeans are worth nearly $15 per bushel, the highest price since last summer.

Opinions are solely the writer’s. Walt Breitinger is a commodity futures broker in Valparaiso, Ind. He can be reached at (800) 411-3888 or www.indianafutures.com. This is not a solicitation of any order to buy or sell any market.

 

 

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