In this post I intend looking at El Nino.
The weather bureau earlier this month put the chance of the
weather event arriving at least 70 percent, potentially as early as June.
An El Nino can cause lower rainfall in Australia and Asia, and
more rains in South America.
Such conditions would be unfavorable for production of wheat in
Australia and sugar production globally providing some support to prices, which
have slumped in recent weeks.
Chicago Board of Trade wheat futures hit a six-month low on
Monday, while ICE May raw sugar were trading near a six-year low in March.
The group head of sugar at Wilmar International Ltd last week
told Reuters that there was a risk sugar prices could rise if an El Nino
emerged.
El Niño is the warm phase of the El Niño Southern Oscillation
(commonly called ENSO) and is associated with a band of warm ocean water that
develops in the central and east-central equatorial Pacific (between
approximately the International Date Line and 120°W), including off
the Pacific coast of South America. El Niño Southern Oscillation
refers to the cycle of warm and cold temperatures, as measured by sea surface temperature, SST, of the tropical
central and eastern Pacific Ocean. El Niño is accompanied by high air pressure in
the western Pacific and low air pressure in the eastern Pacific. The cool phase
of ENSO is called "La Niña" with SST in the eastern Pacific below average and air pressures high in the eastern and low in western Pacific. The ENSO cycle, both El Niño and La Niña, causes global changes of both temperatures and rainfall. Mechanisms that cause the oscillation remain under study.
DEFINITION
El Niño is defined by prolonged warming in the Pacific Ocean sea surface temperatures when compared with the average value. The U.S NOAA definition is a 3-month average warming of at least 0.5 °C
(0.9 °F) in a specific area of the east-central tropical Pacific Ocean,
other organizations define the term slightly differently. Typically, this
anomaly happens at irregular intervals of two to seven years, and lasts nine
months to two years. The average period length is five years. When this warming
occurs for seven to nine months, it is classified as El Niño
"conditions"; when its duration is longer, it is classified as an El
Niño "episode".
SIGNS
The first signs of an El Niño are a weakening of the Walker
circulation and strengthening
of the Hadley
circulation and may include:
- Rise in
surface pressure over the Indian Ocean, Indonesia, and Australia
- Fall in air
pressure over Tahiti and the rest of the central and eastern Pacific Ocean
- Trade
winds in the south
Pacific weaken or head east
- Warm air
rises near Peru, causing rain in the northern
Peruvian deserts
El Niño's warm rush of nutrient-poor water heated by its eastward passage
in the Equatorial Current, replaces the cold, nutrient-rich surface water of
the Humboldt
Current. When El Niño
conditions last for many months, extensive ocean warming and the reduction in
easterly trade winds limits upwelling of cold nutrient-rich deep water, and its
economic impact to local fishing for an international market can be serious.
ECONOMY
More generally, El Niño can affect commodity prices and the macroeconomy of
different countries - and not always for the worst. It can constrain the supply
of rain-driven agricultural commodities; reduce agricultural output,
construction, and services activities; create food-price and generalised
inflation; and may trigger social unrest in commodity-dependent poor countries
that primarily rely on imported food. A University of Cambridge Working
Paper shows that while Australia, Chile, Indonesia, India, Japan, New Zealand
and South Africa face a short-lived fall in economic activity in response to an
El Niño shock, other countries may actually benefit from an El Niño weather
shock (either directly or indirectly through positive spillovers from major
trading partners), for instance, Argentina, Canada, Mexico and the United
States. Furthermore, most countries experience short-run inflationary pressures
following an El Niño shock, while global energy and non-fuel commodity prices
increase.
RECENT OCCURRENCES
Since 2000, a number of El Niño events have been observed. El Niño events
were observed in 2002–03, 2004–05, 2006–07 and 2009–10. A strong El Niño has not occurred
since 1997–98.
In September 2014, the Climate Prediction Center issued an El Niño Watch, stating a 60-65% percent chance of El Niño
development during the Northern Hemisphere fall and winter.
In December 2014, the Japan Meteorological Agency had declared the onset of El Niño conditions, as warmer than normal sea
surface temperatures were measured over the Pacific, albeit citing the lack of
atmospheric conditions related to the event. Months later, on March 2015, the Climate Prediction Center had declared the arrival of El Niño conditions.
If you trade on the stock exchange, like I do, you may suffer a loss or two
in the value of some commodities due to El Nino. But, not to worry, as a
commodity trader, sometimes you lose, sometimes you gain.
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