Fears of the effects of La Niña on commodity prices rise

ForexNewsNow | Published on October 26, 2017 at 4:54 am

Mention of La Niña (‘little girl’ in Spanish) is enough to shivers down farmers’ spines. For most, a cooling of seawater in the Pacific Ocean may be a remote concern, but there is a group of people who don’t have that luxury – commodity traders and farmers. Both these parties have to be wary of the effect of La Niña on commodity prices, although for different reasons.

When does the La Niña event take place?

La Niña is the cold phase of the El Niño-Southern Oscillation (ENSO) cycle. Both terms describe the fluctuation of temperature between the atmosphere and the Pacific Ocean. Being the cold phase, La Niña lowers sea surface temperatures (SSTs) below average by 3 to 5 degrees Celsius. On the other hand, El Niño (‘little boy’ in Spanish) causes a rise in SSTs. The patterns of the ENSO cycles happen every two to seven years, causing a major shift in weather patterns on winds, precipitation, and temperature. Although their effects mainly affect the Pacific region, the domino effects are felt globally.

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This year, the US Climate Prediction Centre (CPC) has raised its forecast of the La Niña phenomena to 55-65%. The institute reported that SSTs had become increasingly negative in September, but they warmed up toward the end of the month. Accordingly, the chances of at least a weak La Niña event had become clear. Meanwhile, the Australian Bureau of Meteorology upped its alert level from neutral to ‘La Niña watch’. If the chances of La Niña rise to 70%, then it would be certain to happen.

What is the impact of La Niña on commodity prices?

The primary effect of the La Niña phenomena is direct – changing weather patterns affect crop production. In the North-West side of the US, temperatures become lower as precipitation increases to cause colder and wetter weather. On the other hand, the South becomes warmer and drier, causing the largest impact by La Niña on commodity prices.

Since the little girl causes dry conditions to the east of the Pacific, the effect of La Niña on commodity prices is huge. Crop production decreases, causing a spike in commodity prices of coffee, soybeans, wheat, etc. To the west of the Pacific, wetter conditions bring high rainfall causing floods, especially in Australia.

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The previous major La Niña event occurred in 2011 and brought with it a cascade of effects on agriculture. In the southern states of the US, the effect of La Niña on commodity prices for grains was catastrophic. A drought in these parts caused reduced production of corn, soybeans, and wheat that led to a sharp spike in their prices. Further down to South America, wet conditions in countries like Colombia and Brazil threatened the production of coffee from the spread of a fungus.

In the rates of Australian Forex brokers and dealers, the effect of La Niña on commodity prices was not as huge as it was in the mining industry. There, floods and cyclones from the heavy rainfall wrecked thermal and coking coal mines rendering them useless.

So far this year, the price of commodities has been on the rise with futures for soybeans, wheat, and coffee. The threat of La Niña on commodity prices is bound to raise these futures even further, which is why commodity traders are so keen. The next report by the CPC is expected to come out in November, which will determine how both farmers and commodity traders move forward.

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