The El Niño weather pattern is officially back, and commodity exchange traded funds, notably those that track agricultural products, could enjoy a nice boost as dry conditions weigh on the supply outlook.
El Niño describes a period of warming sea-surface temperatures in the Pacific, which typically causes heavy rains and floods in South America and heatwaves across Asia and even east Africa, reports Naveen Thukral for Reuters.
Due to the scorching temperatures, the weather pattern can affect the supply chains of agricultural commodities, notably in Australia and southeast Asia. On Tuesday, the Australian Bureau of Meteorology, U.S. Climate Prediction Center and Japan Meteorological Agency declared that sea-surface temperatures are high enough to correspond with an El Niño event, reports Brian K Sullivan for Bloomberg.
The grains market has not priced in the threat to supplies from El Niño as many traders are wary of the boy who called wolf after similar calls for bad weather in 2014 did not come to fruition.
Consequently, many grains prices remain near multi-month lows. For instance, over the past year, the PowerShares DB Agriculture Fund (NYSEArca: DBA) declined 21.4%, iPath Dow Jones UBS Agriculture Sub-Index ETN (NYSEArca: JJA) fell 31.8% and RBS Rogers Enhanced Agriculture ETN (NYSEArca: RGRA) deceased 24.0%.
DBA includes 11.1% cocoa, 11.1% coffee, 12.5% corn, 2.8% cotton, 12.5% soybeans, 12.5% sugar and 12.5% wheat. JJA tracks 28.5% corn, 21.7% soybeans, 13.4% sugar, 12.2% wheat, 10.7% soybean oil, 7.0% coffee and 6.6% cotton. RGRA includes corn 21.0%, soybean 8.8%, wheat 8.4%, sugar 6.7%, cotton 5.7%, wheat 5.7%, coffee 5.3%, soybean oil 5.3%, cocoa 4.0%, palm oil 2.6%, rice 1.2% and oats 1.2%.
Looking ahead, major agricultural producing countries could see significant weather shifts. For instance, India is expecting weaker rainfall this year.