We are in the middle of a double-dip La Niña event that could see weather patterns alter this year. We had a brief break in a La Niña event that occurred last year, but the natural weather-altering phenomenon has returned quickly (hence referred to a double-dip event). The event could be beneficial to coffee and cocoa growing and hence be price negative.
The map below highlights some of the typical changes in weather patterns that result from La Niña events (relative to normal weather at this time of the year).
Source: NOAA
The US National Oceanic and Atmospheric Administration says the probability of La Niña lasting to end of northern hemisphere winter is 85-90%.
A cool southern hemisphere summer could reduce heat damage to Arabica coffee in Brazil, where 45% of the global production of Arabica coffee comes from. Although rains started late in Brazil, flowering of coffee bushes has progressed well, indicating potential for recovery in yields. CONAB, the Brazilian government agency responsible for agricultural and food information, normally the most conservative of forecasters, expects that Arabica output from the country could grow between 22% to 30% this year[1]. Part of the strong growth is due to the “biennial cycles” in Brazil, where yields dip one year and rise the following. In addition, area planted is expected to have risen by 3.8%. But strong growth in yields are expected to come from favourable weather this year.
Cocoa
Cooler weather will also help reduce heat damage to the main cocoa crop that is currently being harvested in Africa. Africa accounts for approximately 70% of global cocoa output. Although wetter weather could damage some of the Indonesian crop (which accounts for less than 10% of global output), the African crop dominates global production.
Although, we caution that not all La Niña years have improved cocoa production, the majority have. The chart below shows how much cocoa production has increased or decreased relative to trend during La Niña years.
[1] ACOMPANHAMENTO DA SAFRA BRASILEIRA: café, V. 5 – SAFRA 2018 – N.1 – Primeiro levantamento | January 2018
Nitesh Shah, Research Analyst at ETF Securities
Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).
