ENSO changes may inject some life back in grain markets

by Drew Lerner
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ENSO drought map
Some computer forecast models recently have been advertising the return of El Niño later this year.

South America weather, as wild as it has been this summer, has failed to pull commodity futures markets out of their doldrums. But that is not a bad thing from the perspective of purchasing raw material for the production of baked foods. However, some other changes are under way in the world that may soon have an impact on market psyche.

First, some computer forecast models recently have been advertising the return of El Niño later this year, and if that occurs there will be some significant changes toward drier weather in Southern Asia. There also are some signs of returning dryness in the southeastern United States, and that may raise more speculation about dryness possibly shifting into the U.S. Midwest during the summer.

Weather conditions over the past few months have not changed much in very many areas around the world. Worry over dryness in the U.S. southeastern states, the central and southwestern U.S. Plains and California has all been eased recently due to some significant precipitation events. Each of these areas still has some level of dryness lingering, but the progress in recent weeks has been toward improvement. That has reduced bullishness on market mentality and kept some pressure on futures prices.

South America’s weather has been quite volatile this summer, especially in Argentina, where flooding occurred in late October followed by a few weeks of unusually dry weather that peaked in early to mid-December. That dry bias in December was followed by several weeks of rain that made most of Argentina too wet once again, and flood damage resulted in several areas. Drying has occurred recently, but only to be followed by some timely rainfall during the first weekend in February.

Despite the problems in Argentina, Brazil is expecting a huge crop, and the production increase from there is likely to counter some of the losses in Argentina. This development has kept a cap in futures trade because of fear that a big Brazil crop after a big U.S. crop will keep soybeans and corn abundant enough to limit market appreciation.

Recent changes in sea surface temperatures in the eastern equatorial Pacific Ocean have raised some debate over whether El Niño conditions will return later this year. One of the models used by the U.S. National Oceanic and Atmospheric Administration (NOAA) has been flashing an El Niño signal for about two weeks. The model not only is advertising El Niño conditions in 2017, but it seems to think that such conditions will be possible in March and April. World Weather, Inc. believes the flashed El Niño signal is occurring too soon, and reality eventually will settle in to delay any potential onset of El Niño for a time later this year — if it occurs at all. Caution is certainly advised when dealing with the prospects of El Niño.

It is not out of the realm of possibilities to go back to El Niño conditions after only a brief break in which La Niña evolved. Similar conditions occurred in 1963-65 in which an El Niño event was followed by weak La Niña conditions and then back to El Niño. Such conditions are not out of the realm of possibilities, and their occurrence has nothing to do with perceived changes in climate. However, the mere implication of El Niño this year already has excited some interests in southern Asia from India to the Philippines.

An El Niño that develops in March, April or May would have huge influence on the performance of southern Asia’s monsoon. Rainfall would be greatly reduced from India through Thailand, Vietnam, Indonesia and Malaysia to the Philippines. Shortages of moisture in these areas might drive some significant interest in coarse grain, oilseeds, cotton, rice and sugarcane produced across the region because of concern that perhaps dryness would become significant enough to affect world supply. Such an event might light a proverbial fire under the futures market with new speculation and worry over potential production issues. However, with that said, there is a tendency for U.S. summer crop production and South America production to be favorable in El Niño years, and that might just buck the trend toward exciting the marketplace after a while.

It is important to note that every El Niño event is different even though there are similarities. Droughts may evolve in El Niño years, and two important drought years (1983 and 1988) occurred in the year following the evolution of El Niño, which may help 2018 look drier. But before we even get to 2018 there may be some developing dryness in 2017 like that of some other developing El Niño event years. Adding that potential into the mix of changing weather patterns does make 2017 a potential transition year moving away from the more recent tranquil weather patterns that helped to induce record setting crops in 2016 with a more stressful environment that places production at risk in 2017 and especially 2018.

All of this is highly speculative, and confidence in the potential for developing drier bias is still quite low because World Weather, Inc. is not convinced that El Niño will evolve as suggested by NOAA. World Weather, Inc. is convinced the model is being much too aggressive in bringing on El Niño conditions, and future model runs will have to back off the trend and at least delay the onset for a while longer.

El Niño is not likely to be the driving force behind a trend change in the United States toward drier biased conditions. Most likely the culprit will be other weather trends in the atmosphere, and many traders and forecasters 
already have taken notice upon the significant drought in the southeastern United States last summer and autumn. Not all droughts in the southeastern United States shift to the Midwest, but most of the Midwestern droughts in recent recorded history seem to have their beginnings in the southeastern United States. The historical record for droughts in the Midwest is not extensive enough to accurately predict drought based on dryness in the southeastern United States, but that does not mean there is not something to the theory.

Medium-term weather forecasts covering the balance of winter and early spring have suggested a returning mini-ridge of high pressure over the southeastern United States. The feature would likely return a drying trend after an abundantly wet winter that nearly eliminated any sign of last year’s dryness. Any return of dryness to the southeastern United States in the next few weeks would play into the comments above about 2017 ebbing toward new dryness in the United States. As the growing season unfolds there may be some northwest shift in dryness toward the Plains and southwestern Corn Belt. This process would occur while some tendency toward El Niño begins, and that may set the stage for a more interesting second half of 2017 and 2018. Again, all of this is quite speculative because no trend is solidly in place today, but these tendencies have been seen before and should be closely monitored for the next few weeks to make sure a trend change of significance is not missed.

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