Well, one of the clearest predictable outcomes from El Niño is a general rise in weather extremes worldwide, especially in the tropics where most agriculture is still rainfed and El Niño’s weather-morphing power is strongest. That tends to make for less than ideal growing conditions for the major agricultural commodities grown there, like rice, cocoa, sugar, palm oil, and coffee—leading to a possible disruption to the global food market. If one chooses to act on this information, farmers’ losses can be investors’ gain. 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.
Last week, Jodie Gunzberg, a commodities expert at S&P Dow Jones Indices, did a crude analysis 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 includ 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, (1983, 1988, 1992, 1995, 1998, 2003, 2005, 2007, and 2010) the S&P 500 gained 16.5 percent on average. During those same calendar years, an investment in the S&P agricultural commodity index gained an average of 24.4 percent—a relative windfall.
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 El Niño episodes on the list above—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. Odds are, though, investing in agricultural commodities right now could fatten some bank accounts.
Here’s why. In India, Brazil, and Indonesia—some of the world’s most important agricultural regions—El Niño usually means drought. The typical boost in production thanks to generally good growing conditions in the United States 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 downgraded the outlook 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’ve previously called the monsoon the most important weather forecast in the world. India has hundreds of millions of farmers, most of which 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, Harsh Vardhan, gave some advice intended to quell fears of a weak economy: "let's pray to God that the revised forecast does not come true."