El Niño is here, and this year’s version . Which is why investors might be wondering, given the forecast: how can I make some quick cash?
One of the clearest predictable outcomes of El Niño is a , especially in the tropics where most agriculture is still rain fed and El Niño’s weather-morphing power is strongest. That tends to make for less than ideal growing conditions for the major agricultural commodities there, including rice, cocoa, sugar, palm oil and coffee, leading to a . If one chooses to act on this information, farmers’ losses can be investors’ gains.
El Niño’s weather extremes tend to happen in a roughly predictable pattern, which is exactly the kind of heads-up someone playing the market might be looking for.
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Last week, Jodie Gunzberg, a commodities expert at S&P Dow Jones Indices, did of how well commodities investments perform in the 12 months following the onset of El Niño conditions. Double-checking her numbers, I found that of the commodities indexes she listed – which include energy, metals, livestock and agriculture – only agriculture significantly outperforms the broader S&P 500 stock market index following an El Niño.
During the year immediately following the past nine El Niño events, the S&P 500 gained 16.5 per cent on average, while an investment in the S&P agricultural commodity index gained an average of 24.4 per cent – a relative windfall.
Odds on investment
Looking a bit deeper, though, there doesn’t appear to be much of a link between the strength of individual El Niño events and increased return on investment: the three strongest of the past nine El Niño episodes – 1983, 1998 and 2010 – resulted in the year with the best agricultural index performance (2010) as well as the only two years with a negative return (1983 and 1998). So consider these correlations with caution. But the odds are that investing in agricultural commodities right now could fatten some bank accounts.
Here’s why. In India, Brazil and Indonesia – some of the world’s – El Niño usually means drought. The typical thanks to generally good growing conditions in the US usually isn’t enough to offset losses in other parts of the world, so a broad index of food prices tends to spike during El Niño years. Hence some investors might buy up agricultural commodities early in the El Niño cycle.
In India, things are starting to look especially bad. The country’s national weather service for this year’s critical monsoon rainfall on Tuesday – the last El Niño, in 2009-10, resulted in one of the worst monsoon failures on record. Because of its importance to India’s economy, I have previously called the monsoon the .
India has hundreds of millions of farmers, most of whom don’t have access to irrigation – and hundreds of millions more who are dependent on stable food prices for their livelihood. Fearing a spike in inflation due to a possible El Niño-induced drought, India’s central bank lowered interest rates again on Tuesday. The country’s minister for earth sciences, , gave some advice intended to quell fears of a weak economy: “Let’s pray to God that the revised forecast does not come true.”
The last 12 months have seen the number of suicides among Indian . A on the tragic trend by BBC News cites the rash of extreme weather as a leading cause. For some people, that same weather will make them a killing.
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