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Nitesh Shah, Research Analyst and Director at ETF Securities

Could El Niño drive up grain prices in 2015?

The price of wheat and corn fell quite substantially last year, mainly on the back of strong planting and favourable weather. Between April and September, the price of corn futures fell from USD5.00 a bushel to USD3.30 a bushel. This year, as a result, US farmers have reduced their planting intentions.

“At the same time, the demand for corn, which is used in biofuels, may fall a little this year on the back of weak energy prices so there will be less need to put these biofuels into the energy mix,” comments Nitesh Shah (pictured), Research Analyst and Director at ETF Securities, a London-based ETF provider. 

“For wheat we could see a 5 per cent increase in prices this year; for corn, which tends to have more growth in South America, the gains could be closer to double digits. We will probably see price gains in corn come later this year than wheat.”

Some market participants are even more bullish on corn if yields do indeed fall, flagging a potential uptick to USD4.50 a bushel; well above the USD3.88 a bushel the September futures contract was trading at on 17th March. 

There’s always a risk, with grains, that weather conditions will be favourable. 

According to the US National Oceanic and Atmospheric Agency, we are currently in an El Niño weather pattern, coming at a time when it will have minimal impact on crops. According to Shah, while the El Niño event is currently weak, “sea surface temperature in the equatorial Pacific Ocean is quite elevated, which means that there is a risk of the El Niño event gaining strength later on this year”.

Combine that with reduced planting and there could indeed be reasons to build longer-dated positions in grains. 

That said, exogenous events have the ability to disrupt commodities. In Q4 last year, this was clearly evident when the threat of an export ban in Russia led to a seven-month high in wheat prices.

Outside of grains, Shah believes that coffee could be another favourable contract. In 2014, the coffee price rose to USD2.20/lb on the back of a drought in Brazil (which produces 45% of Arabica coffee). Since October, however, prices have fallen from USD2.20/lb to USD1.35/lb, which Shah believes is largely unwarranted given the damage caused by the drought.

“Weather conditions have improved in recent weeks but it could be 2016 before we see the condition of Brazil’s coffee crops improve. While the depreciating Brazilian Real has weighed on coffee prices, the currency effect is likely to be transitory given the likely supply deficit this year. So it’s quite surprising that the coffee price has fallen so much for the front-month futures contract. Once the pessimism on the currency lifts and people look at the fundamentals I think there will be potential for an uptick in coffee prices this year as yields will simply be lower,” says Shah.

Shah thinks prices could go back up to the USD1.70/lb range this year. “It was trading at USD2.20/lb last October so there is certainly potential for some upside based on current prices.” 

The overall theme for agriculturals this year is one of tightening supply, says Shah. 

“I think there will be a conscious effort to reduce planting, particularly for grains. With respect to sugar, however, prices will likely remain relatively weak as we head into a fifth year of a supply

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