El Niño And Global Temperature

2015 so far is the hottest on record, globally land and ocean. Here is January-June:


Source: NOAA

And here is July, the hottest month since records began in 1890:

18augu3Source: Slate

The weather phenomenon El Niño is partly responsible. El Niño years are typically hotter than others. 1997-1998 was one such event and gave rise to the outlier on the July chart above.

Sea temperatures so far in 2015 suggest this could be the strongest El Niño yet.

Screen Shot 2015-08-18 at 20.53.25

Source: CNN/NOAA

The impact is a disruption to world weather patterns, in a similar distribution to that shown here:

18augu2The trading relevance is the impact that may have on commodities:


Source: WSJ

The stats since 1991 for El Niño years reveal this:

Screen Shot 2015-08-18 at 20.51.43

Source: FT

In short, some commodities may experience a price surge if factors converge, but a strong El Niño and record global temperatures do not guarantee a good return on a long basket of agricultural commodities, as the averages reveal. In fact Nickel turned out the best performer overall.

Agritultural commodities are currently flirting with their lows again and have come a long way down in price since 2011, but the chart shows that as a class they fell through 1997-1998 despite the weather and temperature factors:

18augu8Source: Investor Key

But things are different now to 1998. Stocks are likely making a bull market peak and deflation is the dominant theme. If we look back to the early 1930s, agricultural commodities were not immune from deflation: demand fell and so did prices. Yet, shortly after that, droughts (as may occur under El Niño) devastated harvests and prices shot up.

The other factor here is the pricing in dollars. Long dollar is a fairly crowded trade currently, and a reversal there could give softs prices a boost. But if the longer term bull trend in the dollar persists then commodities may be kept under pressure.

In summary, the potential for the hottest year and strongest El Niño on record are likely to cause natural disasters and disruptions around the world this year and into next, and certain agricultural commodities are likely to experience significant price rises where these factors converge with others. The broad agricultural ETF takes the guesswork out of which one(s), plus it is fairly beaten down and may represent a trade here. But the deflationary wave may intensify if stocks start to crumble, which could reduce demand further for commodities, and the dollar trend is also a factor.

I’m going to watch developments for signs of supply being notably disrupted and hold off until we see agri prices accordingly waking up, should that occur.