Everyone dreams of warm winters. Moderate temperatures, sunshine, sweet breezes and best of all, low heating bills. Most of American is experiencing mild weather systems and the people are loving it.
Meteorologists attribute the unseasonable weather to El Nino, which occurs when winds in the equatorial Pacific slow down or reverse direction. That warms water over a vast area, which in turn can upend weather around the world. El Nino is forecast to be particularly strong this winter.
So while a warmer winter is bringing relief to some people, it is already having a variety of effects on commodities in different parts of the world. Commodities have taken a beating of late, with oil prices hitting rock bottom and an unsettled Chinese economy providing less demand than it has over the years. And the recent rate hike introduced by the Fed now has commodity markets moving in all directions.
El Nino has added to the disruptions in mining and agriculture in both major and minor economies with energy stocks showing the most risk and cocoa, wheat and soybeans not too far behind.
Oil Hit the Most
Oil seems to be taking center stage as prices end the year hovering in the $35 range and with a glut of the black gold hitting most major oil-producing countries. The unseasonably warm winter weather has left the UK with its highest October stockpiles of oil for the past five years, according to Government figures. And despite billions of barrels of crude sitting on oil tankers in the middle of the ocean in the Middle East, OPEC refuses to cut down on its oil production.
But oil is not the only energy commodity to be effected by El Nino. In a recent interview, David Wilson, a Citigroup UK director in metals research, noted that the warm weather has reduced the need for battery use in Europe and manufacturers are not restocking them. Batteries work on lead and less demand means lower lead prices.
The unseasonably warm winter weather has left the UK with its highest October stockpiles of oil for the past five years, according to Government figures
On the flip side, Wilson believes that the El Nino effect could help raise the price of nickel as nickel miners in the Philippines may be able to operate longer than normal since the rainy season won’t be as severe and there will be less monsoons.
According to Wilson, copper and other minor metals such as lithium may also be hit by El Nino.
Agricultural Commodities
Agricultural commodities are also feeling the effects of the warmer temperatures. Coffee is expected to have mixed results. Vietnam and Indonesia with large robusta (coffee a bitter, lower-price variety found in blends and instant brands) harvests will suffer from El Nino-induced dry weather.
On the other hand, Brazil, a producer of higher-quality arabica coffee, could see its coffee harvest benefit. The states with the most production, Minas Gerais and São Paulo, will probably experience warmer weather, but not necessarily heavy rains that have damaged crops in the past.
Coffee exporters, Uganda and Kenya, may experience lower crop yields due to flooding, while Tanzania is expected to see a bumper crop.
And although Australia’s Department of Agriculture and Water Resources has forecast the country’s wheat yield for the 2015-16 season would reach 25.3 million metric tons, up 7% from a year earlier, other dry wheat-growing regions such as the Black Sea and parts of the U.S. are concerned about a tighter global wheat supply.
Sugar’s price may see a considerable boost as a result of El Nino. Drought conditions in Thailand and India will probably hurt the sugarcane crop, and increased rainfall in Brazil threatens to reduce the sugar content of the sugarcane harvest.
At the end of the day, calculating the direction of commodity prices is a gamble. El Niño has the potential to disrupt the supply of a number of commodities, boosting anemic prices and providing a buying opportunity. But many of El Nino’s effects are contradictory, however, causing drought in one region and floods in another and making the net effect on some commodities difficult to predict.