Title: El Niño Returns: Global Agricultural Prices Rise as Weather Factors Take Center Stage
Introduction:
On July 4, the World Meteorological Organization (WMO) reported the re-emergence of El Niño conditions in the tropical Pacific region after seven years. This climatic phenomenon is expected to lead to further increases in global temperatures, subsequently impacting global agricultural prices. As a result, the futures prices of key agricultural products such as soybeans, wheat, corn, soybean meal, and palm oil have seen a recent surge. The agricultural industry is increasingly advocating for risk management tools like weather index futures to counter the volatility in food prices.
El Niño Returns:
According to the WMO report, El Niño conditions are currently present in the tropical Pacific region, with a 90% chance of continuing into the second half of 2023. Furthermore, the WMO predicts that at least one year between 2023 and 2027 will break the high-temperature record set in 2016, with a 98% probability of this occurring.
El Niño is a natural climate phenomenon characterized by unusually high seawater temperatures in the central equatorial and eastern Pacific Ocean. It typically occurs every 2 to 7 years and can last for several months to over a year. El Niño is determined when the monthly average temperature in the eastern and central equatorial waters of the Pacific Ocean exceeds the average by more than 0.5 degrees Celsius for three consecutive months.
Impact on Agricultural Prices:
The National Climate Center of the China Meteorological Administration has also predicted an El Niño state in the equatorial central and eastern Pacific Ocean this summer. This extreme weather event is expected to lead to more frequent and severe weather conditions such as heavy rainfall, floods, heatwaves, and high temperatures. These conditions are already disrupting major agricultural production areas.
The occurrence of El Niño typically leads to droughts in Southeast Asia, South Asia, northern Australia, and Central America, along with high temperatures in Brazil and northern Peru. Consequently, the droughts’ impact on crop production has sparked expectations of reduced yields, creating a “weather speculation window” in the futures market.
Recent developments include a severe drought affecting the core soybean producing areas in the US Midwest. As a result, the Chicago Mercantile Exchange (CME) soybean, soybean oil, and soybean meal futures prices have experienced significant increases. The soybean 2311 contract in the US hit new highs this week, with a cumulative rise of over 20% since June. Similarly, domestic futures markets have observed a surge in prices for soybean meal, rapeseed meal, No. 2 soybean, and soybean oil.
Other affected agricultural products include sugar from India and Thailand, palm oil from Southeast Asia, and rapeseed from Australia. In past El Niño events, sugar production in India and Thailand experienced a 5% to10% drop, while palm oil yields in Malaysia declined.
Weather Futures: Risk Management Solutions
The potential for another round of El Niño and subsequent food price increases present challenges to the agricultural industry’s risk management. In recent years, China’s futures market has increasingly incorporated the “weather factor” through innovative models like “weather + futures.”
In September last year, the Dalian Commodity Exchange partnered with the National Meteorological Center to launch the “Central Meteorological Observatory-Dashang Exchange Temperature Index.” This index quantifies the cumulative impact of temperature on crop quality and yield, serving as a leading indicator for agricultural decision-making. It helps governmental agencies formulate precise policies and enables agricultural producers to devise production and management plans based on temperature forecasts.
Furthermore, the Guangdong Provincial People’s Government has prioritized the development and listing of weather futures on the Guangzhou Futures Exchange. These futures contracts aim to provide extreme weather risk avoidance services for the new energy industry.
Conclusion:
The resurgence of El Niño and its potential effects on global temperatures have caused a rise in agricultural prices worldwide. To manage the associated risks, the agricultural industry is increasingly looking towards instruments like weather index futures. These tools, backed by accurate weather predictions and temperature indices, enable better risk management and mitigate the volatility in food prices.