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What's Hot: Anticipating the return of La Nina
Key Takeaways
- La Nina is favoured to emerge in September – November with a 71% chance and is expected to persist through January to March 2025
- Historically – wheat, corn, soybean and cotton displayed a greater probability of trading higher six months after a La Nina event had begun
- Inventories of many agricultural commodities remain below their long term average, lowering their ability to absorb a price shock
The conclusion of the 2023/24 El Nino event is now giving way for the likely return of the climate phenomenon La Nina. The cooling of the sea’s surface in July and August now points to a shift towards more neutral conditions. The chances of a La Nina weather pattern forming this year are becoming more likely. According to NOAA, La Nina is favoured to emerge in September – November with a 71% chance and is expected to persist through January to March 20251.
The El Nino-Southern Oscillation Cycle
During La Nina, the tropical Pacific Ocean is cooler than average, putting in motion a series of potential impacts, from stronger rains in Asia to drier conditions in South America. Increased rainfall in Southeast Asia is expected to improve the outlook for rice, sugar and food oils. In contrast, the transition may intensify dry conditions in Latin America, negatively affecting crops and yields for commodities such as soybeans, maize and sugar. Reduced rainfall in South America due to La Nina could delay plantings and further impact yields for the next season too.
In the US, La Nina can result in drought and winter heat to some southern states and heavy rains to the Pacific Northwest. La Nina is also known to intensify extreme weather events such as flooding, drought and heatwaves and hurricanes across key producing regions, adding a layer of uncertainty to the agricultural production and food security.
Source: National Oceanic and Atmospheric Administration, WisdomTree as of 30 August 2024.
Reflecting on past La Nina cycles
Looking back at historical data since 1950, there have been a total of 14 La Nina weather phenomena. On analysing agricultural commodity prices during 13 of those La Nina episodes, we found that wheat traded higher in 12 cases, six months after the La Nina event started. While in 11 of the 13 cases corn traded higher, six months following the start of the La Nina event. In 9 of the 13 prior La Nina cycles, soybean and cotton traded higher six months after the event began. While for most other commodities the results were mixed.
Source: National Oceanic and Atmospheric Organization, Bloomberg, WisdomTree, data from January 1950 to August 2024. Please note in the case of coffee, owing to data availability, we have analysed price performance in 11 prior La Nina episodes compared to 13 for the remaining commodities. Historical performance is not an indication of future performance, and any investments may go down in value.
Conclusion
While the La Nina event is not guaranteed as it holds less than 100% probability, and meteorologists are expecting it to be a relatively weak event2, inventories of many crops remain below the long-term average. Inventories for wheat, corn, sugar and coffee are 9.8%, 2%, 20% and 30% below their five-year historical average3. And so, the ability to absorb a price shock is thinner for these commodities in particular. La Nina could therefore provide an upside price boost for these agricultural commodities.
In addition, sentiment across agricultural commodities remains low. Net speculative positioning across wheat, corn, soybeans, sugar, cotton and soybean oil are well below their respective five-year average.
1 Climate Prediction Center as of 12 September 2024
2 https://www.climate.gov/news-features/blogs/enso
3 United States Department of Agriculture (USDA) as of 3 August 2024
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