Published 12 June 2014
Jodie M. Gunzberg is the global head of commodity indices at S&P Dow Jones Indices, which like Platts is a division of McGraw Hill Financial. In that role, she contributes to an S&P blog, Indexology. In a recent post, she looked at the possibility of an El Nino weather system developing and what it means for commodities. We are reprinting it here for readers of The Barrel.
Climate scientists are predicting record breaking global temperatures from an El Niño expected this year that could boost commodity prices from further disruptions in the supply chain. This year has already been chock-full of supply shocks across many commodities such as nickel, natural gas, coffee and hogs, creating critically low inventories that will be extremely difficult to replenish – especially in volatile weather conditions.
Already climate change has impacted the agriculture sector, so an El Niño may have an even greater impact amid the global warming. Does this mean there may be an opportunity for outsized returns from agriculture or other sectors?
The Oceanic Niño Index has indicated eight historical El Niño periods in the time frame since 1983, when sector data is available for the S&P GSCI. Surprisingly, it’s not the agriculture sector that benefits, at least right away. Notice only 4 of 8 periods resulted in positive returns for the S&P GSCI Agriculture with a slightly negative average return of 88 basis points.
However, livestock fared better with premiums of 7.4%, and the metals showed positive performance in most of the periods with average returns of 25.3% and 8.9% from industrial metals and precious metals, respectively. The super high return in 1986-88 is interesting since the commodity stock cycle was at a similar turning point as today.
Despite the average positive returns in all sectors except agriculture during El Niño, this does not mean there are no opportunities to profit in agriculture from the crazy weather. The spikes in the sector happen with a lag, so it could take up to a year or more to feel the impact though usually at least one spike happens very soon after. On average the first spike month has returned 16.6% with several possible high spikes following.Images data source: S&P Dow Jones Indices and http://ggweather.com/enso/oni.htm. Data from Jun 1983 to May 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting). Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.