Prepared by The Hightower Report

The current El Nino is strengthening and threatening to exceed the strength and intensity of the 1982-83 episode, the strongest of the century. El Nino's occur approximately every 2-7 years and commodity traders are sometimes misled by the impact of these episodes on crop and weather conditions around the world by not considering the intensity, or lack of intensity of each episode. The 1982-83 occurrence was the strongest of the century. The 1997 episode is still only 6 months in the making and the full circle of most episodes is on average: a) rising water temperatures of the eastern equatorial Pacific ocean for about 1 year (El Nino), and then b) falling water temperatures in the same region for about 1 year (La Nina). Given the early intensity of the 1997 pattern, one can conclude that there is at least a good chance that late 1997 and early 1998 could end up being one of the more “abnormal” weather years of this century.

Countries with the highest correlation to adverse weather conditions from the impeding El Nino included Australia and South Africa with Indonesia and the Philippines also strongly correlated. In addition, China and India monsoons can sometimes experience adverse weather conditions. The last 4 months of 1997 and early 1998 promise to include increased volatility for the Agricultural markets, including sugar, wheat, vegetable oils, rice, cocoa and to some extent orange juice.

So far in 1997, the expanding world acreage base and excellent weather have brought about forecasts for record agricultural production in North America, China and Europe due to expectations of higher yields and higher planted acreage. The string of excellent weather years in China, India, Australia, South Africa and Indonesia may be coming to an end if past history of El Nino time periods is considered. While it is difficult to pinpoint the actual weather disruptions which may occur, the enclosed table shows some of the general correlations with strong El Nino periods. The developing El Nino pattern for 1997 is the strongest occurrence since 1982/83 when droughts hit these primary growing (or consuming) countries. In that winter, droughts hit Australia and Indonesia and winter storms battered southern California. In 82/83, overall losses to the world economy resulting from climate changes amounted to $8 billion.

Less powerful El Nino's in '91-'93 and '86-'87 impacted Australia and South Africa, but the current powerful pattern promises to spread abnormal weather to India, where the monsoons were slow to get started and are threatening to withdrawal early. This factor could threatening the winter wheat crop in India and the end of the summer growing season for oilseed crops. In addition, crop problems are likely to begin to develop in Indonesia/Philippines and China, especially in the 4th quarter.

With a drought in Australia as the strongest correlated weather anomaly associated with the El Nino, and the current odds of a very strong episode, declining wheat production for the Australia crop is likely. Australia is normally the worlds 3rd or 4th largest exporter behind Canada and the U.S. In addition, the strength of this current El Nino would bring in the winter wheat crops in India and China as possible problem areas. Consumption in these countries dwarfs most other countries including the U.S. In spite of a long string of successful monsoons in India and bumper crops, India is already expected to import 1-3 million tons this year. Weather problems could easily triple the expected imports of wheat. China is the world's largest wheat producer and the 1997 drought in the northern and western regions of the country (winter wheat region) is threatening to disrupt the planting of this crop. If plantings are not complete in the fall, rainfall in this region of the world is generally very light for the November to February time frame. Given the high consumption of this country, a problem with the winter crop will directly correlate with an increase in imports.

Huge stocks and a record U.S. soybean crop has depressed soybean oil prices to relatively cheap levels. In the strong El Nino of '82/'83, severe droughts occurred in southeast Asia where palm oil production has been able to expand at a rapid pace to fill the surge in world vegetable oil markets. Total edible oil production in 1983 dropped 8.7% from the previous year. Palm oil yields could begin to decline in early 1998 while exports are on pace for another record this year. In addition, lower than expected oilseed production in both China and India may cause U.S. soybean oil imports to increase. Australia canola production should also be down. Watch Malaysia and Indonesian weather into late 1997 for possible weather problems.

Of the top 6 exporters, Australia and Thailand will be under the gun for lower (El Nino induced) yields while the high correlation of droughts in South Africa and the possibility of an early withdrawal of the India monsoons leaves production in these two key countries in question. Sugar production fell over 10% in the last El Nino induced drought in Australia in 1991 and this El Nino is still increasing in intensity which would indicate a severe drought for Australia and southeast Asia. Correlation studies indicate that only conservative El Nino losses to key countries would indicate highs for the March '98 contract at over 14.00 cents and an expiration near 12.50 cents.

With the strong correlation between El Nino and drought in Indonesia, cocoa production in this region will be under the gun. This is the fastest growing production region and in past El Nino's, the impact was not important as the production of cocoa in Indonesia in the '82/'83 episode was quite small. Weather disruptions in this area of the world, central Africa or possible Brazil could disrupt world production during a period of expanding demand.

For daily market updates of the Hightower Report of Comprehensive Commodity Research, call 900-225-2200, extension 1 for Trader's Update. The cost per minute is $1.33.

October 29, 1997The Hightower Report

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Financial Commentary

THE ALLENDALE ADVISORY REPORT | ASTRO-TREND | SPRING OUTLOOK
COMMODITY FUTURES FORECAST WEEKLY REPORT
THE OPTION ADVISOR
COMMITMENT OF TRADERS ANALYSIS-CURRENCY CONTRACTS
MYERS ON FUTURES | NIKKO MARKET COMMENTS | NIKKO MARKET COMMENTS
SORTING IT ALL OUT | INTEREST RATE WATCH | FINANCING AND THE “NEW” CANADA
U.S. TREASURY BOND TECHNICAL ANALYSIS
ITALY: WILL MARKET OPTIMISM BE REWARDED
SEEING THROUGH THE ILLUSIONS IN STRUCTURED FINANCE
EL NINO OUTLOOK | THE REAPER MARKET COMMENTS | WEEKLY OUTLOOK
YOU SHOULD BE FULLY INVESTED FOR THE NOVEMBER-DECEMBER-JANUARY RALLY

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