wmeubank@ocp.kcmo.com
WHAT ABOUT EL NINO?
Prepared by Commodity Review And Outlook
One of the advantages of being in this business for a long while is that even if I don't quite remember what happened in a particular year, I usually have the data sitting in a drawer or file somewhere. This week the Weather Channel is having a series of reports on El Nino. This got me wondering. What really happened in so-called El Nino years? Most analysts I've read suggest that the grains, sugar, cocoa, OJ, and possibly coffee will be affected by El Nino. What these have in common is that they are widely grown in the Southern Hemisphere, where El Nino originates.
As far as I can tell, El Nino is supposed to have occurred every 2-7 years. 1982-83 (the strongest), 1986-87, 1991-93 and 1997-98 are the most recent. Obviously, this is not very precise, and suggests plentiful room for error in judgment as to what happened for what reason. Most of what I've read has concentrated on production figures rather than telling where prices went. I've chosen to look at past price performance. Hopefully, this will give us a better idea of whether or not we are engaging in false hopes as far as El Nino goes.
In 1983 and 1988 there were droughts in the U.S., and the grains staged major bull moves. Corn made a low near 220 in October of 1982, then rallied to over 375 by August of 1983. It then declined to a low of 142 by February of 1987, and then staged a dramatic rally to over 350 by July of 1988. Beans traded much the same way, making a low of near 525 in late 1982, then rallied to 960. By September 1986, beans were under 470, then staged a rally to nearly 1100 by June of 1988. Wheat also made lows in 1982, trading near 300 before rallying to 410 in 1983. In 1993 we had flooding in the Midwest. By October of 1992, corn had made a low of nearly 200, then rallied to over 310 by January of 1994. The same time frame was true of the beans. They made a low under 525, then rallied to 755 by July of 1993. Wheat, on the other hand, made its low in August of 1992 near 300, then rallied to 415 by March of 1993, and subsequently declined back to nearly 275 in June of 1993. The 1998 growing season is ahead of us, and new-crop grains, (December corn, Nov. beans) have already begun putting in a weather premium. Since El Nino tends to be centered in the Southern Hemisphere, grains could be at risk in Australia and South Africa as well as Brazil. While a drought correlation exists for South Africa and Australia, Brazil has had flooding in some regions, droughts in others, specifically in the north. The U.S. as well has had disparate effects. The question remains: Were these past events caused by El Nino?
Sugar has had less spotty results...and plenty of action. In 1983 sugar more than doubled, trading from the low 600's to over 1300. In 1986, sugar had a lot of action, both higher and lower. It started the year in the mid-500's, rallied to over 950 by April, then declined to the mid 400's by August. By March of 1987, sugar rallied to the mid 800's, declined to nearly 500 by August, but then staged a major rally to over 1500 by July of 1988. Sugar continued its wild action by then dishing up a decline to under 700 in December of 1988, followed by a long-term move higher to over 1600 by March of 1990. The production landscape has changed considerably since then. Cuba was a major producer, with production of 7,000,000 metric tonnes, versus 3,200,000 most recently. The largest producer in 1985-86 was the Soviet Union; today the largest producer is India. Thailand was not a producer of significance. Now it is one of the largest and most important exporters along with Australia. Brazil was and is an important producer. It is also important to note that much of the long move higher from 1985 to 1990 may have in part been prompted by sugar prices declining to under 300 in 1985. This may have discouraged production and eventually led to higher prices. Producers such as China, India and Brazil may or may not be affected by El Nino. Many European countries are significant producers, such as France and Germany. While they have had unusual weather in much of Europe, it is uncertain as to the cause. With Thailand and Australia major exporters, and both in the path of El Nino, sugar could once again return to the center stage.
Cocoa made a major low under 1400 in 1982 and then began a multi-year rally to end near 2800 in January of 1984. From the 1982 lows, cocoa rallied to nearly 2500 in the latter half of 1983, declined to under 2000 near the last quarter of the year, before finally reaching its ultimate goal. Since then, prices have languished, trading down to near 800 in 1992, with El Nino having no discernible effect on prices. The Ivory Coast is overwhelmingly the world's largest cocoa producer, with production last quoted at 860,000 tonnes. The next largest producer is Brazil with production of 306,000 tonnes. Thus far, there have been no definite problems with the Ivory Coast crop, and some weather forecasters do not believe that the Ivory Coast will suffer at the hands of El Nino. Other producers such as Malaysia and Indonesia have had problems, but a bountiful crop in the Ivory Coast and no definite problems yet in those two countries cast a pall on cocoa's future. Cocoa has been running a supply/demand deficit for quite a while. On the face of it, this sounds bullish, but when prices have been perceived as being too rich, demand has suffered. It may take a trigger in the form of a weather problem or increased consumption to get cocoa going, so while the supply deficit is nominally bullish, don't buy cocoa on that account.
Orange juice may have a reasonable correlation with El Nino. From a low of just above 100 in January of 1983, OJ rallied to 190 by May of 1984. However, it must be noted that by January of 1985, there were fourincidences of sub-freezing temperatures in Florida. Were these because of El Nino or merely a cooling trend that once existed and is now history? Brazil, Florida and Mexico are the largest producers, in that order. By March of 1986, OJ had declined to the low 80's before beginning a long rally to over 204 in July of 1988. And again, in January of 1991, OJ made an interim low of near 103 before rallying to over 174 by November of 1991. Then, by February of 1993, OJ had fallen to lows of almost 65 before turning and moving to 134 in September. The question has to be raised again, were these rallies due to El Nino? The lows certainly suggest a correlation. Production has increased dramatically in the last few years, but it only takes one solid freeze to send this market skyward. In Mexico or Brazil, droughts are the concern. I am not aware of a correlation between El Nino and freezes in Florida, but there seems to be a pattern of higher prices in or shortly after El Nino events.
Coffee is a bit more questionable, but that complaint can almost always be levied against coffee. January of 1983 saw coffee prices in the low 120's, with a rally by year's end to 156 or so. In the beginning of 1986, coffee was trading in the 270's, declined to nearly 200 in February, then rallied back to 275 in March. Another day in the life of the coffee market. Most of that rally was probably the result of a seven-month long drought in Brazil in 1985, a non-El Nino year. Coffee continued its decline into April of 1987, making a low near 98, before finally managing another rally back to 166 or so by January of 1989. Coffee stayed in the doldrums until a low was finally made near 48 (!) in August of 1992. It gradually clawed its way higher, finally staging an explosive rally from the low 7000's in March of 1994 to a high of over 263 in July of 1994. A serious freeze was at the bottom of this move. Coffee production is centered mostly in the Southern Hemisphere, with Brazil and Colombia the major producers. Indonesia is also a significant producer. The extremely low prices seen in 1992 were probably the major force behind much of the recent rally in coffee prices, with 1994's freeze weighing in. Coffee often falls prey to violent swings. While weather has been an issue, production cutbacks due to low prices, changes in the roasting industry, and the removal of price-support quotas by the International Coffee Organization may be more significant as regards coffee prices as opposed to El Nino.
I'm not sure what I learned by doing this bit of searching through old files and folders. However, knowledge is power. Coffee and cocoa seem to be less the El Nino markets than previously thought, but the shortfall in cocoa suggests staying abreast of the market. Sugar and OJ seem to have had consequences due to El Nino, but again, extreme low prices, and relationships between weather patterns that have yet to be established suggest some caution. Grains seem to have moved higher near the same time frame of El Nino, but two droughts and one flood seem to me to be lacking in consistency. All that being said, corn, bean oil, sugar, and cocoa are all on the tight side of the supply scale. While they may not benefit from El Nino, they are still markets that deserve attention. If El Nino becomes an issue, so much the better.
December 4, 1997M. Steven Morgan
Commodity Review And Outlook
195 Route 6A, Suite 6, Orleans, Massachusetts
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com