Turning Up the Heat in Grains?
Fiala, David, Futures (Cedar Falls, IA)
Many watchers of El Nino, and its colder counterpart La Nina, have been disappointed when anticipating bullish grain moves in 1998, unless they've been following specific products. Damage from El Nino around the globe spurred demand, which triggered 16% to 20% rallies in soybean oil and rice markets this year. The most phenomenal trading opportunities in the history of the grain markets have come during post-EI Nino periods, similar to our current situation. If the bean oil and rice rallies are any indication, this will be a year of opportunity to trade grains.
Early last year when El Nino surfaced, traders scrambled to identify correlations with past El Nino episodes and many looked for a U.S. drought; that was premature. The U.S. winter as a whole was warm and wet, especially along the Pacific coast. The major exceptions were a dryer winter in the extreme northern Midwest and cooler than normal temperatures in the South. Moderate and possibly severe drought concerns did exist for South Africa, parts of Asia, Australia, Central America and northern South America.
No problems were expected for the major soybean and corn production areas in southern South America. There is a high drought correlation in the United States during periods of La Nina following a strong El Nino episode.
If we look solely at expected weather patterns from El Nino years and compare them to this past year, there are similarities. The United States produced a record soybean crop in 1997 and one of the largest com crops in history. The dry winter in the northern Midwest and Canada, cool South and heavy precipitation in California all fit well into the El Nino weather pattern. The major South American soybean areas harvested a record crop this spring as expected. Looking back, El Nino has produced weather patterns nearly identical to past systems, which strongly suggests a hot dry 1998 summer if the Pacific turns to La Nina now.
The Pacific Ocean temperature is mimicking patterns of 1983, 1988 and 1995 (see chart). …