El Ni帽o is here, and this year鈥檚 version . Which is why investors might be wondering, given the forecast: how can I make some quick cash?
One of the clearest predictable outcomes of El Ni帽o is a , especially in the tropics where most agriculture is still rain fed and El Ni帽o鈥檚 weather-morphing power is strongest. That tends to make for less than ideal growing conditions for the major agricultural commodities there, including rice, cocoa, sugar, palm oil and coffee, leading to a . If one chooses to act on this information, farmers鈥� losses can be investors鈥� gains.
El Ni帽o鈥檚 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.
Advertisement
Last week, Jodie Gunzberg, a commodities expert at S&P Dow Jones Indices, did of how well commodities investments perform in the 12 months following the onset of El Ni帽o conditions. Double-checking her numbers, I found that of the commodities indexes she listed 鈥� which include energy, metals, livestock and agriculture 鈥� only agriculture significantly outperforms the broader S&P 500 stock market index following an El Ni帽o.
During the year immediately following the past nine El Ni帽o events, the S&P 500 gained 16.5 per cent on average, while an investment in the S&P agricultural commodity index gained an average of 24.4 per cent 鈥� a relative windfall.
Odds on investment
Looking a bit deeper, though, there doesn鈥檛 appear to be much of a link between the strength of individual El Ni帽o events and increased return on investment: the three strongest of the past nine El Ni帽o episodes 鈥� 1983, 1998 and 2010 鈥� 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. But the odds are that investing in agricultural commodities right now could fatten some bank accounts.
Here鈥檚 why. In India, Brazil and Indonesia 鈥� some of the world鈥檚 鈥� El Ni帽o usually means drought. The typical thanks to generally good growing conditions in the US usually isn鈥檛 enough to offset losses in other parts of the world, so a broad index of food prices tends to spike during El Ni帽o years. Hence some investors might buy up agricultural commodities early in the El Ni帽o cycle.
In India, things are starting to look especially bad. The country鈥檚 national weather service for this year鈥檚 critical monsoon rainfall on Tuesday 鈥� the last El Ni帽o, in 2009-10, resulted in one of the worst monsoon failures on record. Because of its importance to India鈥檚 economy, I have previously called the monsoon the .
India has hundreds of millions of farmers, most of whom don鈥檛 have access to irrigation 鈥� 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 Ni帽o-induced drought, India鈥檚 central bank lowered interest rates again on Tuesday. The country鈥檚 minister for earth sciences, , gave some advice intended to quell fears of a weak economy: 鈥淟et鈥檚 pray to God that the revised forecast does not come true.鈥�
The last 12 months have seen the number of suicides among Indian . A on the tragic trend by BBC News cites the rash of extreme weather as a leading cause. For some people, that same weather will make them a killing.
This article first appeared on
