La Niña is coming: Here’s what it means for commodity markets

La Niña is coming. Hot on the heels of a record setting El Niño, another potentially strong weather phenomenon with very different characteristics could emerge later in 2016.

A consensus of longer-range computer models now show La Niña conditions emerging by around July, and should peak this winter at a moderate intensity. Strong El Niños are much more likely to be followed by a La Niña. The three strongest El Niños on record — in 1972, 1982 and 1997 — all transformed into La Niñas. In the video below the US National Oceanic and Atmospheric Administration explain what’s about to happen.

The timing of La Niña’s arrival is important to commodities markets as the weather phenomenon has vastly different effects on global climate than its warm counterpart, El Niño. For example, in agriculture markets, if La Niña moves in on the early end of the range by June or July, US summer crops could face complications with dry and hot weather, threatening corn and soybean crops. But dry regions of Australia, Southeast Asia, and Sub-Saharan Africa could receive ample rainfall prior to the peak of their next crop season. Such a scenario could lead to lower supplies of rubber, palm oil, coal and tin.

Source: FT

The last time La Niña arrived after a strong El Niño, in 1997 agricultural commodities showed little upward movement. Concerns about demand for all commodities after the Asian financial crisis limited any upside risk to prices. Fast forward 19 years and concerns about demand growth in many emerging economies are again not far from the surface while high agricultural stock levels should also act to limit the potential for higher prices.

La Niña could result in more hurricane activity in the US Gulf, potentially cutting oil and gas output from the region. Whereas the El Niño pattern warms waters, which correlates with more wind shear in the Atlantic basin, hindering the development of tropical cyclones. Conversely, the opposite is true with La Niña, where the cooler water in the Pacific leads to more favorable conditions aloft including less wind shear that leads to more development. According to Colorado State meteorologist Philip Klotzbach, over twice as many hurricanes have impacted the US during La Niña years as opposed to El Niño years.

Often forgotten in the shale hype oil output from the US Gulf is booming with supply expected to rise by 8% in 2016 to over 1.8 million b/d, offsetting declines elsewhere in the US. The last significant hit to oil output in the region came in 2008 from Hurricanes Gustav and Ike. With US Gulf output growing so fast any disruption could have a more significant impact on oil prices than we’ve seen for several years.

Related article: The changing of the seasons

Likely turn in potash prices suggests secure fertiliser supplies now

Rabobank has  published new research on the global potash industry highlighting the potential for further price falls but that buyers need to keep a close eye on the long term as suppliers may be close to managing output more effectively providing a floor to prices. The outlook for potash prices is especially important for US farmers who are likely to be strong buyers of fertiliser as the spring planting season begins.

Since the 2007-08 food crisis potash prices jumped 10-fold to $873 per tonne as farmers sought the key crop nutrient. Since early 2009 when prices peaked they have more than halved to around $400 per tonne in early 2013 as the key markets of India and China sought alternatives.

Potash price chart

Rabobank explain that “Until recently, the potash market was mired in acute demand uncertainty and piling inventory levels across key consumption regions.” The report says that the near-term market has turned in favour of buyers giving them the opportunity to negotiate substantial discounts on 2013 contracts.

In the near term fertiliser buyers need to be wary of a rebound in prices. Indian and Chinese buyers may now return to the market to take advantage of lower prices. Meanwhile, following the drought in the US farmers have high cash levels and with the USDA raising the prospect of a record corn and soyabean harvest demand for fertiliser may be high.

With the potash market characterised by an oligopolistic market structure an increase in demand may well lead incumbent suppliers to increase prices once more.

In the longer term the current low prices (by recent historical standards at least) are proving a problem for new entrants into potash supply. According to Citigroup many of the new greenfield projects rely on a price of $450 per tonne to deliver satisfactory returns.

If new supply does come on the prospects for potash supply over the next few years prices could be even lower. CRU forecasts potash prices falling by around 15% in the period to 2017.

Related article: Global food prices fall to five-month low

Currency war has mixed results for manufacturers

Attention on the prospect of an escalation in the ‘currency war’ as economies seek to devalue their currencies hoping to gain a competitive advantage has tended to focus on the potential gains that exporters may reap. However, there is a flip side for economies devaluing their currencies and for manufacturers in particular. A decline in a currency simultaneously increases the cost of imports. If a manufacturer needs to import commodities and/or sub components its input costs may increase significantly if its currency devalues, irrespective of the underlying fundamentals of the commodity concerned.

The chart below from HSBC highlights those currencies most and least active in the so-called currency war. Japan has been one of the most active economy in managing its currency.

Currency wars


The yen fell towards its lowest level against the US Dollar for 33 months this week as Japan’s prime minister signaled that there would be no change to the country’s ultra loose monetary policy. The most recent Markit PMI data from Japanese manufacturers revealed that despite lower buying activity input prices rose in December, the first increase since April 2012.

For manufacturers outside Japan, further down the supply chain and which depend on the import of refined components, the decline in the yen may also lower costs. For example, the Hong Kong watch industry is the worlds largest importer of assembled moving parts, 57% of which and comprising 30% of total production costs, come from Japan.

In contrast to commodity price changes and their affect on input costs, exchange rate fluctuations are much more transparent to buyers further down the supply chain, buyers who may anticipate changes in a manufacturers input costs in their negotiations.