ENSO and the Global Soft Commodity Markets

aWhere has been discussing the potential impacts of the current El Niño event on global agricultural soft commodity prices for several months, and we believe l that we are at the start of a shift in some of these markets as we look to 2016.  The current positive phase El Niño has been described not only as the strongest El Niño since the 1997-98 event, but possibly the strongest over the last 50 years.  While it is difficult, if not impossible, to forecast a market bottom (see first futures snapshot from FinViz below), our analysis points to the current weather pattern coupled with broader macroeconomic themes as support for a constructive pricing regime in 2016, notably world sugar.

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(source: FinViz)

For the Number 11 sugar market, the past year and conditions looking forward are looking favorable for Brazil, the largest cane producer.  However, the ENSO driven pattern which is producing a healthy precipitation outlook for Brazil’s Centre-South, is also contributing to dryness across many of the worlds other origins, particularly India, Thailand, Australia and southern China.  Looking at the 2015 Indian Monsoon, there is a well-documented relationship between positive phase ENSO and a weak Monsoon.  This year has been no exception as the all-India weighted rainfall was 14% below normal from June through September according to statistics provided by the Indian Meteorological Department.  However, this does not tell the entire story.  The poor rainfall is magnified across the cane regions in the north, so output for this year and the coming year will likely be below initial expectations.   The chart below shows the rainfall departure vs. normal for the last 30 days in the concentrated region identified where 80% of India’s sugarcane is grown.  We can see that there is a stronger negative rainfall distribution in these regions, and this will likely be reflected in output numbers for 2015/16 and 2016/17.

 

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India’s sugarcane is grown.  We can see that there is a stronger negative rainfall distribution in these regions, and this will likely be reflected in output numbers for 2015/16 and 2016/17.  Similarly, we see a precipitation deficit across other AsiaPacific origins, and in spite of a healthy pattern in Brazil, we feel that the output reductions in the other key regions will start to limit the surplus.  Even in Brazil, the world price has been at relative parity with the domestic cost to produce, which cuts into margins of producers.  This, coupled with a strong weakening of the Brazilian Real, will serve to support a constructive market for the remainder of this year into next, and we have already started to see some of this reversal.

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