Record high temperatures in October may be a prelude to a strengthening El Nino weather pattern, potentially leading to opportunities in the commodities space and related exchange traded products.
Last month was the hottest October since records have been kept in the past 136 years and the eighth record-breaking month so far this year, reports Tom Randall for Bloomberg.
This week, the El Nino phenomenon started setting records as well, with some of the highest weekly temperatures ever recorded across the equatorial Pacific.
Even if November and December show unusually cool temperatures, which observers highly doubt, the past few months have been so sizzling that 2015 will go down as the hottest year on record.
For commodity traders, the rising temperatures have disrupted normal weather patterns, leading to powerful typhoons, spoiled cocoa harvests in Africa and fires in Indonesia, which may leave opportunities to pick and choose commodity exposure, especially as oil prices remain weak.
Leading the charge, soft commodities or products that are grown have been outperforming. The iPath Bloomberg Softs Subindex Total Return ETN (NYESArca: JJS) rose 9.7% over the past three months while the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) has declined 7.4%. JJS tracks 53.3% sugar, 23.5% coffee and 23.2% cotton. DBC, on the other hand, includes a 53.6% tilt toward energy commodities.
Looking at regional effects on individual commodities, in India, the reduced monsoon rains could lead to lower sugar crops. Additionally, wet conditions in Brazil could also dent sugar harvests there. Investors can track sugar prices through the iPath Bloomberg Sugar Subindex Total Return ETN (NYSEArca: SGG) and the Tecrium Sugar Fund (NYSEArca: CANE), which have jumped 31.6% and 17.9%, respectively, over the past three months.
Dry weather in West Africa and problems with the cocoa harvest also boosted the iPath Bloomberg Cocoa Subindex Total Return ETN (NYSEArca: NIB) and iPath Pure Beta Cocoa ETN (NYSEArca: CHOC), which rose 10.3% and 3.9%, respectively, over the past three months.
Lower precipitation and droughts across Australia could decimate wheat and other crops. The Teucrium Wheat Fund (NYSEArca: WEAT) is the only ETF to track wheat price movements. WEAT was down 5.9% over the past three months.
The dry weather could also mean less water to run hydro-powered mining equipment in Indonesia, the largest nickel producer in the world. The diminished production would affect nickel exchange traded notes, including the iPath Bloomberg Nickel Subindex Total Return ETN (NYSEArca: JJN) and iPath Pure Beta Nickel ETN (NYSEArca: NINI), which have fallen off 17.3% and 16.7, respectively over the past three months. Weakness in the global economy, notably from China, may have weighed on demand for industrial metals.
Below-average rainfall in coffee-growing Vietnam, Indonesia and Central America could lower crop yield expectations. Warm weather could reduce the risk of frost in Brazil, the largest coffee producer in the world, and could diminish crop output as well. The iPath Bloomberg Coffee Subindex Total Return ETN (NYSEArca: JO) and iPath Pure Beta Coffee ETN (NYSEArca: CAFÉ) track coffee prices. Over the past three months, JO declined 18.9% and CAFE fell 16.8%.
Lastly, wetter conditions in Chile, the world’s largest copper producer, could lead to flooding in copper mines, which would impeded supply. For copper exposure, look to the iPath Bloomberg Copper Subindex Total Return ETN (NYSEArca: JJC), iPath Pure Beta Copper ETN (NYSEArca: CUPM) and United States Copper Index ETF (NYSEArca: CPER). Over the past three months, JJC dipped 10.9%, CUPM was up 0.2% and CPER was 9.0% lower.
For more information on the commodities space, visit our commodity ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.