Thursday, May 28th, 2020

El Niño and Wheat Options


In the Americas we associate the El Niño weather system with excessive rain. However, when El Niño floods the Americas it typically causes drought in South Asia. Thus India has signed the biggest wheat import deals in a decade according to the India Times.

Flour millers in India and the local units of global trading giants have sewn up deals to import 500,000 tons of premium Australian wheat since March, trade sources said, the biggest such purchases in over a decade, despite surplus stocks at home.

Concerns that untimely rains in February and March would cut wheat output, especially of high-protein varieties grown in central India, first drove flour millers in the country’s southern ports to place the orders.

The issue, however, is not untimely rains that will hurt output but a drought similar to that of 2007 in South Asia. How do El Niño and wheat options connect? If production goes down, prices go up. But how does El Niño affect other wheat producing areas?

The American Corn Belt

AgriClimate Connection writes about the potential impact on the corn belt of the coming El Niño year.

In early May 2015, the Climate Prediction Center reported that weak to moderate El Niño conditions were present in the Pacific Ocean basin, along the equator. Furthermore, there is a greater 90% chance it will continue through summer and a greater than 80% chance it will last through 2015.

Now that El Niño has arrived, it’s influence on the NWS climate outlooks released last Thursday is considerable. For June (first figure, top row), the Southern Plains are expected to have an increased chance of cooler-than-average temperatures. A large part of the US is expected to have an increased chance of wetter-than-average precipitation, including portions of the southern and western Corn Belt.

These are not drought conditions so; in general, wheat production in the Corn Belt will not be hurt. El Niño will hurt crops in Australia and South Asia. Traders of futures options for wheat should be alert for higher prices as production falls.

How Much of a Shortfall?

Bloomberg addresses the issue of Australian wheat production and prices noting that wheat traded at a two month high this week.

Australia cut its wheat-crop outlook as the first El Nino since 2010 threatens to curb yields, adding to signs the pattern may disrupt food production around the world, with Japanese forecasters saying Wednesday it will intensify.

The harvest may total 23.6 million metric tons in 2015-2016 from 24.4 million forecast in March, the Australian Bureau of Agricultural & Resource Economics & Sciences said in a report on Wednesday. Output was 23.7 million tons a year earlier and 25.3 million in 2013-2014, it said. Farmers in the world’s fifth-biggest exporter begin harvesting about October.

Australia last month declared the El Nino, which can parch the country’s eastern states, and cause droughts in Asia and wetter, cooler summers in North America. The event may cut global wheat output 1.4 percent, the United Nations’ Food & Agriculture Organization predicted. India said the pattern may crimp this year’s monsoon, potentially hurting food output.

Wheat prices will go up as production falls and demand intensifies. The connection of El Niño and wheat options is the expectation of higher prices.

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