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The weather pattern causes drought in some areas and floods in others and it's roiling commodity markets.

Bloomberg, Content provider

April 30, 2021

5 Min Read
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By Brian K Sullivan, Fabiana Batista and Jasmine Ng

Global prices for food and crops are at multi-year highs and there’s a culprit far larger than human commerce: La Nina.

This year, the weather pattern has already made its mark in North and South America as well as Australia and Indonesia. Characterized by the cooling of the equatorial Pacific, La Nina triggers atmospheric gyrations that cause water scarcity in some places and floods in others. And the prospect of drought across the U.S. — and difficult weather just about everywhere else — is roiling commodities markets. Combined with falling yields and growing demand from China, the result is soaring food prices and fears of inflation among world governments.

“Drought is an added cost that producers, processors, retailers, and consumers alike can’t afford right now,” said Jacqueline Holland, an analyst at Farm Futures.

For grain and livestock producers, “processor and end-user demand for commodities is strong and revenue potential is high,” she said. “But input costs have risen alongside profit expectations.”

In the U.S. and Brazil, the outlook is especially gloomy.

More than 48% of the contiguous U.S. was gripped by some level of drought through April 27 and just over 68% was abnormally dry, according to the U.S. Drought Monitor. Drought is particularly dug in across the U.S. West, but it reaches through the Great Plains and into parts of Iowa, Illinois, Michigan, and even New England.

Drought Monitor

RelatedMarch 2021 was the eighth warmest on record

One reason for concern is that drought can be self-perpetuating. When land is dry, the sun’s energy is focused on heating the air instead of evaporating water. That raises temperatures, which leads to more dryness, which allows drought to spread even further.

Drought Strains the Western U.S.

The problem is already affecting winter wheat across the Great Plains and it could creep into the corn and soybean areas of the western Midwest as summer nears, said Don Keeney, an agricultural meteorologist at Maxar Technologies Inc. With rains averaging 40% to 45% of normal levels, the Midwest “is drier than a lot of people think,” he said. Crop areas in the Mississippi Delta region are also dry, but they could be helped later this year as the remnants of Atlantic hurricanes and tropical storms move up the center of the U.S.

The western part of the country is likely to remain parched.

“The drought has been long enough out there, it is going to take a couple years to get the reservoirs back to where they should be,” said Dale Mohler, a meteorologist at AccuWeather Inc.

In Brazil, many farming areas have received only 60% of the normal amount of rain, said Keeney.

Domestic corn prices have more than doubled in 12 months. Adverse weather hurt the first of the country’s two annual corn crops and now threatens the second, which represents 76% of the nation’s total supply. Last week, Chicago-based firm MD Commodities cut by 7.2% its estimate for the second crop due to the persistent dry conditions. The outlook is for almost no rain in key producing areas in May.

“I don’t see any hope for any big improvement for the next three weeks,” Keeney said. “They are going to be under the gun for the rest of the season.”

Parched soil has also pushed up grain, feed, and coffee prices across the country.

Dry conditions have hit Europe too, with rain as much as 80% below normal from Italy to Ireland, although rains in recent weeks have started to alleviate some of the stress. Swathes of the continent were gripped by cold spells in late March and early April, severely damaging vineyards and fruit orchards, according to a European Commission report. Rapeseed and durum wheat also suffered, while soft-wheat fields largely weathered the freeze.

Juan Luciano, chief executive officer of crop trader Archer-Daniels-Midland Co., said weather woes were limiting the availability of wheat for global buyers.

“Canada and France are too cold and too dry,” Luciano said on a conference call with investors. “That has put some pressure on wheat with all this demand.” 

In Australia, widespread summer and autumn rain is setting up farmers for a bumper winter grain crop. While the country’s worst floods in decades damaged some vegetable crops in the eastern states, higher-than-average rainfall across the grain-growing regions of Western Australia between January and March has delivered useful subsoil moisture and could mark one of the best early starts for the state since 2005.

Meanwhile, prices for palm oil — the world’s most-consumed edible oil — have experienced a stunning rally after a deluge of rain in Indonesia and Malaysia during the first quarter and are up 11% so far in 2021 after two straight years of gains. Yields, still recovering from long-term effects of drought, fell to multi-year lows. However supply is likely to benefit over the next six to 12 months from wetter weather, which promotes fresh growth of the tropical plant.

India is likely to see a typical monsoon this year, according to Mohler — good news for an economy that has been ravaged by a devastating wave of Covid-19 infections. While there has been a little drought in southern China, the country overall should have a decent year.

La Nina itself is fading or gone, depending on who you ask.

The U.S. Climate Prediction Center says the weather pattern is winding down and will disappear during the summer, while the Australian Bureau of Meteorology — which defines La Nina by different criteria — has declared it over.

The good news for the northern hemisphere is that La Nina’s impact tends to be muted or non-existent through summer, although normal weather patterns will keep things dry. There is a 46% chance La Nina will return in the last three months of the year and a 41% chance the Pacific will stay neutral, according to the U.S. Climate Prediction Center. Neither would help U.S. farmers desperate for water.

--With assistance from Kim Chipman, Anuradha Raghu and Megan Durisin.

To contact the authors of this story:

Brian K Sullivan in Boston at [email protected]

Fabiana Batista in Sao Paulo at [email protected]

Jasmine Ng in Singapore at [email protected]

© 2021 Bloomberg L.P.

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