With warming surface temperatures and light winds in the Pacific Ocean, scientists are predicting a return of the weather system known as El Niño. Characterized by heavy rains in some parts of the world and drought in others, the extreme weather conditions El Niño typically delivers have a strong impact on grains market production and pricing.

The Past Effects of El Niño

Historically, El Niño has led to dry conditions in Australia, India, Malaysia and Indonesia, while wet conditions tend to be seen in South America, Central America and parts of the United States. In extreme El Niño years, drought has ravaged Australian wheat and barley crops. Rainfall reached just 69 percent of the average in the 2006/2007 season, a severe El Niño year, leading to a wheat harvest that was 45 percent below the average.

In South America, however, heavy to moderate rainfall in the critical summer months has helped corn and soybean production in the past. SLC Agricola, a large Brazilian corn, soybean and cotton producer, emphasized that El Niño years typically relate to very good production in the southern parts of the country and produce little negative effects elsewhere.

El Niño has a minimal effect on grain production in the United States, as the weather tends to affect the southern and western parts of the country more than the central grain production areas.

“Past experiences have taught us that El Niño years tend to be favorable for the central U.S. corn and soybean growing areas,” said Jay O’Neil, Kansas State University senior agricultural economist. “We can take solace in the belief that El Niño should not have a substantial negative impact on our crop production.”

A Cautious Market

Fear over the effects of El Niño is working its way into commodity price predictions. Currently, U.S. investment managers are expecting increased prices in all 16 major agricultural futures markets, according to U.S. Commodity Futures Trading Commission data.

“If the markets are concerned more about weather patterns across the country and across the globe, that’s going to find their way to prices,” Matt Forester, CFG Asset Management chief investment officer, told the Wall Street Journal.

Even so, most are cautious about predicting how high prices will go, as scientists are still debating the severity of the upcoming El Niño weather system. “Our perspective is that whenever there’s a weather factor, it is something to be aware of, but not overly zealous in pricing it in ahead of time,” said Stefan Kip Astheimer, Howe and Rusling, Inc. vice president of strategy to the Wall Street Journal.

The forecast for El Niño can cause concerns over production and prices in grains, but the weather system does not always mean higher prices and lower supply. In less severe years, El Niño can have little to no impact on grain yields. For example, Australia has seen shortages in only four of the last seven instances of El Niño, with the others having average or above average yields. So, while El Niño is expected to have an effect on grains markets this season, only time will tell what the impact will be.