El Niño: Key Implications For Commodities


BMI View: The high probability of El Niño returning in H214 poses downside risks to production of key commodities in 2014/15 in large producing countries. We believe palm oil, rice and sugar will be the most affected should El Niño develop this year. The impact on other commodities, including wheat and cocoa, will be less acute.

Meteorologist departments across the globe forecast a return of the El Niño weather phenomenon in H214. Although the slowdown in warming of the tropical Pacific Ocean over the past several months will most likely delay its return, meteorologists estimate the probability of El Niño occurring this year at between 60-80%. In late June, the United Nation's World Meteorological Organization estimated that there is a 60% chance El Niño will set in by the end of August, and the probability of its return by December reaches 80%. Assuming El Niño forms, forecasters tend to predict a moderate-strength event rather than either a weak or strong occurrence. Although at this time the likelihood of a return of the phenomenon is relatively elevated, there is still uncertainly regarding its timing, location and magnitude.

El Niño refers to the extensive warming of the central and eastern tropical Pacific that leads to a major shift in weather patterns across the Pacific. It is typically associated with below-normal rainfall across Asia Pacific, including South East Asia and Australia, and with above-normal rainfall across North and South America, mainly during the second half of the calendar year. However, the relationship does not always hold, as there are examples where weak El Niño events have resulted in severe dryness, while at other times strong events have resulted in a relatively modest impact.

Significant Impact On Production
Palm Oil - Global Production Growth (% y-o-y) & El Niño Events

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Sector: Commodities, Agribusiness