From searing temperatures to torrential rain, extreme weather events are becoming more commonplace due to the effects of climate change. Coupled with the Russia-Ukraine crisis — which continues to block grain exports despite talks of a “Black Sea Initiative” deal — these macro stresses are taking their toll on the global agricultural commodities market.

Agricultural supply is highly weather-dependent and the El Nino-Southern Oscillation (ENSO) cycle — a natural climate phenomenon involving changes in the water temperatures of the central and eastern tropical Pacific Ocean — has a strong bearing on world crop production. On top of this, extreme weather events and climate change are increasing the risks of crop failure.

World crop production is highly weather-dependent

Graph shows anual effect of El Nino/La Nina on weather-dependent crops

The production of corn, wheat, soybeans and cotton depends heavily on the weather and production patterns year-over-year have fluctuated with adverse weather throughout the El Nino/La Nina cycle.

According to Paul Janish, Global Commodities Meteorologist at J.P. Morgan, July 2022 is shaping up to be the warmest on record for the Northern Hemisphere — intensifying concerns over spring crop yields and production potential. In the U.S., much of the Corn Belt experienced triple-digit temperatures in recent weeks, stressing crops in their key reproductive phase. Similarly, the U.K. is facing the prospect of a drought being declared in August, which could lead to widespread crop failure — especially if farmers are banned from irrigating their crops due to the water shortage.

In Germany, the water levels of the Rhine are running dangerously low as a result of a persistent heatwave, measuring just 71 centimeters at Kaub, the river’s bottleneck, in mid-July. As the Rhine is one of Europe’s most important shipping routes, this spells bad news for the transport of goods — including grain — and could further exacerbate supply-side risks.  

We’re anticipating some deterioration in crop conditions, building of soil moisture deficiencies and pullback in the yield potential of key grain and oilseed crops — at a time when we have critically tight exportable supplies of agricultural products available to the world market.

“Weather is a very material driver here and now,” said Tracey Allen, Agricultural Commodities Strategist at J.P. Morgan Research. “We’re anticipating some deterioration in crop conditions, building of soil moisture deficiencies and pullback in the yield potential of key grain and oilseed crops — at a time when we have critically tight exportable supplies of agricultural products available to the world market.”

Currently, J.P. Morgan Research projects the national U.S. corn yield will decline below trend, toward 175 bushels per acre, but this figure could decrease as a result of extreme weather risks. Similarly, trade sources suggest that European maize production potential may slip from 70 million tons to below 60 million tons, which would eliminate export prospects.

So what exactly does this mean for grain prices? For corn prices, which are currently hovering around $6 per bushel, J.P. Morgan Research forecasts suggest that there is a potential 20-30% upside on the basis of supply-side disappointments. “When we look at the extent to which prices have collapsed, we are now seeing new crop prices in 2023 track below the cost of production — for corn and for wheat. The market is really in need of a supply response,” said Allen. 

Adverse weather often coincides with food price inflation

Graph looks at the effect of weather on weather-dependent food prices

Food price inflation has typically been driven by supply-side shocks, often due to adverse weather. Between May 1990 and May 2022, ex-China agricultural inventories have often fallen as the Bloomberg Agriculture Index (BCOM AG) rose. 

The FAO Food Price Index often tracks the ENSO cycle

Graph titled The FAO Food Price Index often tracks the ENSO cycle

The FAO Food Price Index, which is a measure of the monthly change in international prices of a basket of food commodities, has often tracked the ENSO cycle between June 1990 and June 2022. 

Outside of agriculture, the impact of severe weather is felt across the commodities sector. For instance, in oil markets, hurricanes and storms can significantly disrupt crude production and refining activity. In recent months, extreme weather events such as Winter Storm Uri and Hurricane Ida caused oil production in the U.S. to plummet.

High oil prices in turn weigh on crop prices. Historically, episodes of food price inflation have often been coupled with elevated energy prices, as fertilizer, fuel and transportation costs are critical drivers of agricultural production margins — which in turn drive supply responses.

As the planet heats up, weather patterns will continue to change. This will undoubtedly influence the outlook for key agricultural commodities in the coming months. 

Food prices and energy prices tend to rise at the same time

Graph showing how food prices and energy prices tend to rise at the same time

Between July 1989 and July 2022, the FAO Food Price Index and Brent crude oil prices rose at similar times, particularly around pivotal events such as the housing bubble collapse and the COVID-19 pandemic. 

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