ETF Securities Research Blog

Watch out agriculture: La Niña is coming

Yesterday the National Oceanic and Atmospheric Administration (NOAA) and the International Research Institute for Climate and Society (IRI) raised their forecast for a La Niña to 75% starting this Northern Hemisphere Autumn. While meteorologists are often wary about putting out forecasts with such confidence before June, the combined cooling of sea surface and underwater temperatures has helped their assertion. In all 6 occasions since 1979 when there has been cold subsurface water temperatures during spring, a winter La Niña has emerged.

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La Niña weather events typically bring cooler, wetter weather to South America, Southern Africa, Australia, Indonesia, Canada and parts of the US.

Looking at historical La Niña episodes that started in the Northern Hemisphere Autumn/Winter, our analysis shows that most agricultural prices fell one year after the event hit a moderate intensity. The notable exception is sugar. Many South American crops benefit from reduced drought risk and heat damage. US winter wheat typically benefits from better snow cover. We expect that most of these crop impacts will be seen in 2017.

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Earlier this week, the US Department of Agriculture released its initial assessment of US and world crop supply and demand prospects for 2016/17. While market prices rallied on the back of reduced ending stocks, production forecasts for 2016/17 US corn, wheat and soybean beat Bloomberg consensus forecasts. The projections for world corn and soy production in 2016/17 were also higher than production in 2015/16. While these forecasts are highly tentative (planting of the crops in many cases has not even taken place yet), if they materialise, soy and corn prices are likely to fall.