At-a-glance
- La Niña returned in late 2021
- Up to 1998, La Niñas were generally bearish for crop prices
- Since 2010, La Niñas has been associated with rising crop prices
- The last two La Niñas have also occurred at time of generally rising commodity prices
The La Niña weather phenomenon that began in October 2020 has returned for a second round. By December 2021 the waters along the central/east central equatorial band of the Pacific Ocean had returned to significantly below-normal temperatures. More broadly, the water temperatures in much of the America’s side of the Pacific were below normal. Meanwhile, sea surface temperatures in the Atlantic have been significantly above normal (Figure 1).
Figure 1: La Niña returns with cooler temperatures along the Pacific’s east central equatorial band
La Niñas are generally associated with cooler, wetter winters in the Northern U.S. and Canada along with dryer and warmer conditions in the southern U.S. The phenomenon can also disrupt weather in South America, correlating with droughts in parts of the continent and wetter-than-normal weather in other parts. Argentina, Brazil, Uruguay, and Paraguay have been hit by record high temperatures during their summer than began in December.
Since 1959, when the National Oceanic and Atmospheric Administration (NOAA) began measuring El Niño and La Niña with their Oceanic Niño Index (ONI), there have been nine previous major episodes of La Niña (Figure 2). We define a major episode as one in which the ONI falls below -1°C (or rises above 1°C in the case of an El Niño).
Figure 2: There have been 12 major El Niños and nine major La Niñas since 1959
Of the nine, the first seven were associated with periods of generally declining crop prices. In the 12 months after the beginnings of La Niñas in January 1971, August 1973, December 1984, June 1988, September 1998 and October 2007, prices for corn, wheat and the soybean complex generally fell. The only exception during the period from 1971 to 2007 was the La Niña that began in July 1975, which featured a rise in soybean prices and relatively unchanged prices for corn and wheat.
The last two La Niña’s have been different. Spot prices for corn and the soy complex rose in the 12 months following the beginning of the August 2010 La Niña. Wheat prices fell slightly. In the 12 months after the October 2020 La Niña began, prices rose for corn, wheat, soybeans and notably for soybean oil. Only soybean meal prices declined (Figure 3).
These two most recent episodes of La Niña struck at a time when commodity prices were generally rising amid periods of quantitative easing by the Federal Reserve and other major central banks. Oil prices rose significantly in the summer of 2010 and early 2011 as the Arab Spring uprising contributed to concerns about supply. Since October 2020, energy prices have once again been on the rise as travel slowly recovers from the pandemic amid constrained supplies for crude oil. Oil and agricultural markets exhibit a high degree of co-movement in prices (appendix charts 1-5), in part, because corn, wheat and soybeans are often used to create biofuels and also because energy is among the input costs for agricultural goods.
Figure 3: Pre-2010, La Niña’s usually coincided with falling crop prices
In addition to macroeconomic factors, another explanation for rising crop prices during periods of La Niña might have to do with booming production of corn and soybeans in South America. Prior to 2000, U.S. exports of corn and soybeans dwarfed those from South American producers such as Argentina and Brazil. However, in the past few decades, South America has surpassed the U.S. in terms of net exports for corn (Figure 4) and soybeans (Figure 5).
At the time of the 1998 La Niña, South American corn exports ranged from 1-2% of world production. Now, their exports equate to nearly 7% of global corn production. With soybeans, South America’s rise has been even more dramatic. South American soybean exports were the equivalent of 6% of global production in 1997-98. For 2021-22, the U.S. Department of Agriculture estimates that their exports will total more than 25% of global soybean production.
La Niña’s biggest impact on North America tends to come during the winter, well away from the critical growing and harvest seasons. To the extent that La Niña impacts North American summers, it appears to be associated with relatively ideal growing conditions.
By contrast, La Niña tends to impact South America during their summer months, capable of doing more damage to crops. This may be part of the reason why the past two La Niña’s have been so bullish for crop prices. Now that South America dominates corn and soybean exports, what happens there becomes critically important to global markets.
Figure 4: South American corn exports rose from 1-2% of world production in 1997-98 to nearly 7%.
Figure 5: South American soybean exports rose from 6% of world total in 1997-98 to over 25%.
If any possible supply disruptions dissipate from the region along with the tensions, wheat prices might decline globally in response, and Black Sea wheat prices could face more pressure than other benchmarks.
If Black Sea tensions dissipate, wheat prices might fall globally in response and Black Sea prices could have further to fall than other benchmarks. By contrast, the opposite might occur should the situation escalate further.
Appendix Charts
Appendix 1:
Appendix 2:
Appendix 3:
Appendix 4:
Appendix 5:
South American Soybean Futures
As the largest producer and exporter of soybeans, Brazil plays a key role in the global soybean market, driving the need for a regional benchmark for price discovery.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
