The chances of a La Niña weather pattern developing have fallen, removing a potential weight on agricultural prices.
The US National Oceanic and Atmospheric Administration has downgraded the probability of a La Niña weather pattern this year to around 40% from above 70% when they made their assessment in June. Neutral conditions are favoured with a probability of about 55%-60%.
In February we published our analysis which showed that if a La Niña starts in the Northern Hemisphere Autumn/Winter, it would be supportive for the growing of wheat, corn, soybean, coffee and cocoa and hence it would be price negative. Now that the probability of that event has diminished, we believe that a source of negative price pressure has been removed.
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However, in the short term, prices of grains remain under pressure. Despite the poor EU wheat crop due to weather damage, we are likely to see record global wheat production this year as yields in the US and Russia have remained very strong. The Northern Hemisphere wheat harvest for 2016/17 is largely over and the winter wheat planting for the next season will now take place. Given the elevated stocks (outside of EU), we could see wheat planting reduce, which if confirmed will be price supportive during the 2017/18 crop.
Corn is also likely to see record global production in 2016/17. The US harvest is likely to be completed around November. Once again, if elevated stocks are confirmed, planting of next year’s crop, which will start in March 2017, is likely to be pared down.
Arabica coffee has been in a supply deficit for the past two years. The absence of a La Niña could mean a dryer Southern Hemisphere Summer which could continue the recent rally we have seen in coffee prices (up 10% in the past 3 weeks).
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).
