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El Nino's ill-wind may blow some good into markets

By Jeremy Stewart

Published 26/05/2015

Snow joke: the world could be facing abnormal weather patterns
Snow joke: the world could be facing abnormal weather patterns

It is not quite chaos theory with a butterfly flapping its wings in the Amazonian jungle, but meteorologists now agree that the El Nino weather phenomenon has returned and could have a global impact.

Although there is high uncertainty over how strong the El Nino effect will be, current forecasts suggest it could be similar to the El Nino of 2009-10. The world could be headed for a period of significant abnormal weather patterns.

Unlikely as it may seem, this is of particular interest to investors in commodities and to those involved in agriculture, a sector of special importance to Northern Ireland.

Adverse weather poses a risk to wheat, sugar, coffee and palm oil production in Southeast Asia and Australia. It is the same for cocoa, coffee and sugar suppliers from South America and to corn and wheat production taking place in the US. Clearly the effect is global and not just local to these markets.

There are emerging expectations that there will be general upward pressure on a range of soft commodities. There may be price increases for corn, soybean and wheat over the next 18 months, albeit somewhat dampened by current stock levels. Wheat and corn production in particular is more at risk of being affected negatively by the forecast adverse weather. Over time such an increase in some commodity prices could also feed into some upwards pressure on UK inflation.

Both the wheat price and the corn price currently trade at a premium in the forward market, but this premium has not changed significantly following the recent El Nino news and more or less reflects historic price volatility.

So, recent price rises may have further to go. Given the downwards trend in soft commodity prices over the last couple of years this could be good news for commodity investors and arable farmers and associated businesses.

Maybe an unusual case of an ill-wind blowing some good. But let's keep a sharp eye on the weather forecasts.

Jeremy Stewart is head of wealth management and private banking at Danske Bank

Belfast Telegraph

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