El Niño, Climate Change & The India Monsoon

by Jim Roemer | Aug 21, 2023 | Commodities, Economy, Environment, Global Warming

El Niño weather conditions can have varying impacts on different commodity sectors. Here are some of the sectors typically most adversely affected during El Niño years:

• Agriculture – El Niño often brings heavy rains and flooding to parts of South America, which can damage crops like soybeans, corn, wheat, rice, coffee and sugarcane. Food production and crop yields tend to decline in affected regions.
• Energy – El Niño winters tend to be warmer than average in the US, decreasing demand for heating oil and natural gas. Milder winters can also reduce electricity demand. This drop in energy demand can negatively impact the oil, natural gas and power sectors.
• Metals & Mining – Heavy rains from El Niño can disrupt mining operations for commodities like coal, copper, iron ore and gold in countries like Indonesia, Chile, Peru and Australia. This can constrain output and drive prices higher.
• Palm Oil – Production of palm oil in Southeast Asia, especially in Malaysia and Indonesia, tends to fall during El Niño events due to reduced rainfall and drought conditions. Supply disruptions can lead to higher prices.
• Fishmeal – El Niño conditions often drive anchovy populations away from the coast of Peru, resulting in reduced catches of this fish that is processed into fishmeal and fish oil. This can impact the global supply of fishmeal for animal feed.

Presently, this is what I have been watching for my WeatherWealth newsletter clients with various futures, ETFs and option trade ideas. Climate change is also having a major global effect.

A) Weak Indian Monsoon for oilseeds, sugar, wheat, oilseeds, rice, and possibly cotton 

B) Australia’s and Argentina’s developing drought for wheat

C) China’s historical heat waves and mixed floods and droughts may have damaged some of the corn and especially cotton crops.

D) Record warm oceans creating too much rain for the West African cocoa crop where disease issues have helped prices rally 10% more in the last 2 months.

E) Wet September weather in northern Brazil could cause some harvest delays or sucrose dilution to the sugar crop and cause an early bloom for coffee that is not wanted

India’s August rainfall may be the lowest since 1901

El Niño often disrupts the Indian Monsoon. The monsoon is very important to India’s economy and has a $3 trillion annual effect on agriculture. Presently, it is the driest since 1901 and I do not see that trend changing, following excellent July rains. This will have a “lag” effect on markets such as soybean oil, sugar, rice, wheat, and possibly cotton and be one partially bullish factor in these markets.