El Niño Weather Could Shake Commodities Market

More harsh weather may lie ahead in a brewing El Niño weather pattern. If so, that could cause a spike in volatility for commodities markets, particularly agricultural commodities.

El Niño describes a phenomenon of warm water in the Pacific. It often leads to low air pressure in the eastern part of the Pacific Ocean and high air pressure in the west. This, in turn, shapes how rainfall patterns develop — or don’t, as the case may be. In Asia and the western U.S., for example, rainfall during El Niño years slows down, impacting the agricultural commodities grown in these regions. It can also lead to higher-than-average temperatures.

A report by the World Meteorological Organization (WMO) predicts record heat in the months forthcoming. If so, that would further exacerbate the continuing geopolitical factors already affecting agricultural commodities, such as Russia’s invasion of Ukraine.

See more: “Black Sea Grain Extension Could Sway Ag Commodities

Now, record heat could present further challenges.

“A warming El Niño is expected to develop in the coming months and this will combine with human-induced climate change to push global temperatures into uncharted territory,” said WMO Secretary-General Prof. Petteri Taalas in a press release.

“This will have far-reaching repercussions for health, food security, water management and the environment. We need to be prepared,” Taalas added.

As El Niño Approaches, Consider Active Commodities Exposure

Weather impacts agricultural commodities in a variety of ways. For starters, sweltering heat could cause droughts, which in turn diminishes supplies of crops like corn or wheat.

If this comes about, then diversified commodities exposure may offer investors an option to mitigate the potential volatility. Even better, active management could help investors add a layer of volatility protection. Active managers would be able to seize on tactical, weather-related opportunities and avoid commodities with poor fundamentals.

Diversified exposure and active management both exist in the Neuberger Berman Commodity Strategy ETF (NBCM). The fund has been outpacing the Bloomberg Commodity Index benchmark, as well.

As mentioned, NBCM uses active management, which allows for fluidity when adding commodities exposure. With its active management style, NBCM puts the portfolio holdings in the hands of seasoned portfolio managers, allowing for changes to holdings when market conditions warrant necessary adjustments.

The active management adds a layer of flexibility to an investor’s portfolio, especially given that commodities can be volatile at times. Unlike the rigidity of the Bloomberg index, NBCM’s holdings can be tailored for greater exposure to certain commodities when they exhibit strength, and vice versa when there’s weakness — if volatility erupts, more safe haven commodities like gold can be added and more volatile commodities reduced.

The fund invests in commodity-linked derivatives with an active risk-balanced, diversified approach that seeks to minimize the effects of market volatility — which is connected to the commodities market. Tactical exposure adjustments expand potential alpha sources by considering top-down macro variables among commodity sectors and individual commodity outlooks to take advantage of short- and long-term opportunities.

For more news, information, and analysis, visit the Commodities Channel.