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El Niño and La Niña set to cause commodity havoc

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Nitesh Shah, Director – Commodities Strategist at ETF Securities finds that lingering weather impacts from El Niño could provide upside price risks for cocoa in the short-term as the market has underestimated the impact of dryness on the mid-crop which will be harvested from May in most of Africa. 

Shah says: “We are currently in the one of the most extreme El Niño events on record (with records dating back to 1950). El Niño refers to the warm phase of the El Niño-Southern Oscillation (ENSO) which is a scientific term that describes the fluctuations in temperature between the ocean and atmosphere in the east-central Equatorial Pacific. The warm phase of the ENSO has led to droughts in Asia and excess rain in South America, leading to a 50 per cent rally in sugar prices between August and December 2015 for example. According to the Australian Bureau of Meteorology, out of the past 26 El Niño events since 1900 approximately 40 per cent have been followed by a La Niña, the cold phase of ENSO.
 
“As El Niño fades, La Niña weather conditions look increasingly likely to emerge later in the year. La Niñas that reach a ‘medium’ strength by northern hemisphere winter tend to help the production of grains, coffee and cocoa. We caution investors however, to wait for a confirmation that the weather pattern will emerge as early as winter 2016/17. If the weather event is delayed until spring/summer 2017, then the price impacts could be very different. Remember, the El Niño expected in 2014 did not emerge until 2015.”

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