Earlier this week, the Australian Bureau of Meteorology announced that Australia is now in the midst of an El Nino climate pattern. The declaration of El Nino is not news as such; the US government’s National Oceanic and Atmospheric Administration announced the cycle in June while the World Meteorological Organisation followed suit in July. However, the announcement from the BoM comes at a time when multiple agricultural commodity markets are already witnessing upwards price trends due to the looming impacts of El Nino. In this week’s article, we’ll look at a few commodities and the likely impact of this climate pattern over the next year.
Cocoa
Cocoa prices have been steadily climbing for over a year, and last week saw record highs for London cocoa futures, while New York futures witnessed the highest prices in over 44 years. Cocoa prices have been primarily climbing on supply-concerns which will be furthered by El Nino conditions. During the strong El Niño event of 2015-2016, both Ghana and Ivory Coast experienced lower-than-average rainfall and drought conditions. Cocoa production in Ghana was particularly affected, as the dry weather stressed cocoa trees and led to a decrease in cocoa yields and quality.
The warmer weather which West Africa usually faces during an El Nino year causes other issues for cocoa production, such as delaying the usual harvest as the cocoa beans take longer to develop. The higher temperatures also increase the chance of black pod disease developing in the cocoa crop, which can cause substantial reductions in annual production. There have already been concerns about the severe spread of black pod disease this year; recently, the Cocoa Research Institute of Nigeria estimated that over 40% of the domestic cocoa crop could be lost to the disease this year, according to ING.
Sugar
Similar to cocoa, sugar has been on a long upward price run. Although prices for Sugar #11 futures dipped in late June, the market has predominantly followed an upward trend for over 3 years and recently climbed to 12-year highs. Sugar is produced across the globe, and as a result faces different challenges in different locations resulting from El Nino. For example, during the 2015-2016 El Niño event, drought conditions in Thailand significantly reduced sugarcane yields and led to a decrease in sugar production. Concerns about Thailand and India facing similar patterns of drought over the next year have increased concerns about the supply from two of the major sugar-producing countries.
While the effects of El Nino in Brazil can vary according to the specific region of the country, the harvest process in 2015 was disrupted by the weather. Due to heavy rainfall, the timely harvesting and transportation of sugarcane to mills was affected, and these logistical challenges contributed to the price increase sugar experienced during the 2015-16 period. In total, the 2015-16 El Nino caused a reduction in global sugar production of around 7 million tons. With prices already at such high levels and amidst a period of food insecurity in many nations, a similar decrease over the next year could yet cause prices to reach, or even surpass, the levels last seen in 2011.
Coffee
Another commodity likely to be impacted by El Nino is coffee, which is grown around the world similarly to sugar. A key difference, however, is the geographical spread of arabica and robusta coffee beans and how the respective locations of these crops could impact their prices over the next year. Arabica coffee enjoyed 2 years of increasing prices from Q4 2020 to Q4 2022 but currently sits over 25% lower than at the same time last year, although prices have increased in recent days. Robusta coffee prices, meanwhile, are more than 20% higher than during September 2022 having climbed significantly in Q2 2023 on supply concerns and reduced production in Indonesia.
Brazil is the largest producer of both arabica and second largest for robusta beans, so the El Nino conditions there will affect the markets for both beans. Other key arabica producers are primarily based in Central and South America, such as Colombia, Peru and Honduras, although Ethiopia is a notable exception to this rule. During an El Nino event, these countries can often face reduced precipitation leading to drought conditions, which stresses the coffee plants and can lead to smaller yields with lower-quality beans.
Robusta beans, or at least those which are not grown in Brazil, are typically grown in south-east Asia, with Vietnam the leading producer and India and Indonesia also significant contributors. During El Nino, these regions can face drier conditions which are detrimental to the development of coffee trees; drought particularly impacted robusta production in Vietnam during the 2015-16 El Nino.
There are many other crops which will be impacted by El Nino conditions, such as wheat in Australia facing drier conditions and crops in the southern US facing increased chances of heavy rainfall and flooding. Given the high prices many agricultural commodities have witnessed over the past few years, it is understandable that the threat of decreased supply in the coming year has markets on edge.
