La Niña: An opportunity to short ags and go long sugar, says ETF Securities

Feb 17th, 2016 | By | Category: Commodities

ETF STRATEGY NEWS! ETF Strategy is delighted to announce the launch of ETF Strategy Hub (hub.etfstrategy.com), an on-demand repository of webcasts, videos, podcasts and white papers. Debuting with Special Series on Technology & Innovation in China and the Digital Economy.


As El Niño fades, La Niña weather conditions look increasingly likely to emerge later in the year, according to research from exchange-traded products issuer ETF Securities. The London-based commodities specialist notes that La Niñas that reach a “medium” strength by northern hemisphere winter tend to help the production of grains, coffee and cocoa and so a La Niña starting in winter 2016/17 could be price negative.

El Nino and La Nina to cause stormy commodity markets, according to ETF Securities

Nitesh Shah, Director – Commodities Strategist at ETF Securities.

According to Nitesh Shah, Director & Commodities Strategist at ETF Securities, we are currently in the one of the most extreme El Niño events on record. El Niño refers to the warm phase of the El Niño-Southern Oscillation (ENSO) which is a scientific term that describes the fluctuations in temperature between the ocean and atmosphere in the east central Equatorial Pacific. The warm phase of the ENSO has led to droughts in Asia and excess rain in South America, leading to a 50% rally in sugar prices between August and December 2015, for example.

Shah cites Australian Bureau of Meteorology research that shows that out of the past 26 El Niño events since 1900 approximately 40% have been followed by a La Niña, the cold phase of ENSO. The International Research Institute for Climate and Society’s regression models peg the probability of a La Niña event at 53% by September. According to Shah, La Niña tends to have the opposite effect of El Niño: places with droughts under El Niño tend to have excess rain under La Niña and vice-versa.

According to Shah: “Our analysis of previous ENSO cycles identifies nine distinct La Niña events of a medium magnitude since 1959 (8 for coffee since 1972 and 6 for soybean oil since 1979 due to lack of price availability). We look at how commodity prices have performed one year from the date a certain threshold of La Niña intensity has been reached. At a first glance it appears as if there is no clear directional impact from La Niña events. For most commodities there have been a similar number of price positive events as price negative.  Based on NOAA model forecasts of a greater than 50% probability of La Niña starting in northern hemisphere Autumn, we could hit threshold intensity by winter 2016.

“Looking at the crop cycle and weather impacts at different times of the year in various geographies, we believe there is a logical reason why prices should rise or fall in a winter La Niña. We believe that if a winter La Niña 2016 is confirmed, there is good reason to short wheat, corn, soybeans, coffee and cocoa and go long sugar.

“We caution investors however, to wait for a confirmation that the weather pattern will emerge as early as winter 2016/17. If the weather event is delayed until spring/summer 2017, then the price impacts could be very different. Remember, the El Niño expected in 2014 did not emerge until 2015. In the meantime, lingering weather impacts from El Niño could provide upside price risks for cocoa in the short-term as the market has underestimated the impact of dryness on the midcrop which will be harvested from May in most of Africa. Cocoa prices have fallen more than 20% since December as the market has focused on ample port deliveries failing to recognise that supply overall this year could be tight.”

Depending on how El Niño and La Niña pan out, ETF Securities offers investors looking to trade these themes a range products, both long and short, including:

ETFS Coffee (COFF)
ETFS 1x Daily Short Coffee (SCFE)

ETFS Cocoa (COCO)
ETFS 1x Daily Short Cocoa (SCOC)

ETFS Wheat (WEAT)
ETFS 1x Daily Short Wheat (SWEA)

ETFS Corn (CORN)
ETFS 1x Daily Short Corn (SCOR)

ETFS Soybeans (SOYB)
ETFS 1x Daily Short Soybeans (SSOB)

ETFS Sugar (SUGA)
ETFS 1x Daily Short Sugar (SSUG)

Tags: , , , , , , ,

Leave a Comment