(c) Financial Times, London – By Jack Farchy
Already buffeted by drought in Russia and floods in Pakistan, commodity markets are now facing up to a new potential disruption: La Niña.
The recurring weather phenomenon, caused by a fall in water temperature in the tropical Pacific, could alter rainfall and temperature patterns across some of the world’s most important tracts of agricultural land.
The effect on individual crops is hard to predict, as a negative effect on growing conditions in one area might be balanced out by better conditions elsewhere.
But with markets already febrile after Russia’s drought and ban on grain exports, traders are braced for further weather-induced volatility.
“It’s a bit scary because what with grain prices rising, if you have more adverse weather it doesn’t take much to move things,” says Kona Haque, agricultural commodities analyst at Macquarie.
Meteorologists say La Niña conditions have begun and are likely to strengthen throughout the rest of the year to a climax around December – meaning that the greatest impact is likely to be felt in the southern hemisphere breadbaskets of Argentina, Brazil, South Africa and Australia.
“All indicators in the Pacific Ocean show that we are now in the early stages of a La Niña event,” said the Australian Bureau of Meteorology.
The US National Oceanic and Atmospheric Administration is forecasting that La Niña conditions will “strengthen” and last until early 2011.
La Niña – “the little girl” in Spanish – is the opposite phenomenon to El Niño – “the little boy”, a reference to the Christ child – which was named by Peruvian fishermen more than a century ago to describe the appearance, around Christmas, of a warm ocean current off the South American Pacific coast.
The current La Niña comes on the back of the strongest El Niño since 1997, which dissipated in May. It caused widespread drought, making the first seven months of 2010 the hottest on record and pushing up the price of raw materials such as sugar and rubber.
The past two months have demonstrated the power of weather events to move commodity markets. Until the Black Sea region grain crop was ravaged by drought, hedge funds saw apparently easy profits in betting that prices of grains such as wheat would continue to fall.
Since then, the cost of wheat has soared 60 per cent, and the corn price is up more than 20 per cent.
While La Niña may increase production of some crops in some regions, such as corn in South Africa, investors are more likely to focus on the potential shortfalls it could cause.
“We’re talking to a lot of folks who are starting to get interested,” says Joel Widenor, director of agriculture at Commodity Weather Group, a consultancy. More than anywhere, investors will be looking to Argentina, where La Niña could bring dry weather and reduce yields.
The country is the world’s largest exporter of corn after the US, and the third-biggest soyabean exporter.
“The most impact is on the Argentine situation,” says Mr Widenor. “It looks like the worst of it will be during their summer, that would be a big problem for them.”
While the country is a smaller player in wheat, the state of its crop has been thrust into the spotlight by the devastating drought in the Black Sea region.
La Niña weather patterns “correlate strongly” with below average wheat yields in Argentina, according to Luke Chandler, grain analyst at Rabobank in London.
La Niña’s effects will be felt beyond South America. In the US, it is associated with a more active Atlantic hurricane season, which meteorologists expect to pick up in the coming weeks, disrupting oil and gas production and lifting prices. It is also associated with a stronger monsoon season in Asia, which has already hampered production of commodities as diverse as palm oil and tin in Indonesia.