We often come across terms like 'El Niño' and 'La Niña' whenever the weather around us is getting either too hot/dry or too rainy.
What exactly are El Niño and La Niña, and how do these climate patterns impact corn production - let's find out!
What is El Niño and La Niña
El Niño and La Niña are climate patterns in the Pacific Ocean that can affect weather worldwide.
According to an explanation from the National Oceanic and Atmospheric Administration (NOAA) in the US, a normal condition in the Pacific Ocean is where we see "trade winds blowing west along the equator, taking warm water from South America towards Asia." During the process, a process called 'upwelling' happens, where cold water rises from the depths to replace the warm water.
Meanwhile, El Niño and La Niña are opposing climate patterns that break these normal conditions. These weather phenomena are also called the El Niño-Southern Oscillation (ENSO) cycle.
(i) General impact of El Niño on the US
When El Niño happens, warm water spreads further and stays closer to the surface. As such, this releases more heat into the atmosphere, creating wetter and warmer air.
El Niño has different effects on different parts of the US. Northern US, for instance, will be dryer and warmer than usual. On the contrary, the US Gulf Coast and Southeast region will experience a wetter climate, with an increase in flooding incidents.
(ii) General impact of La Niña on the US
La Niña has the opposite effect of El Niño. Southern US tends to experience drought while Northern US will experience downpours and floods. During a La Niña year, winters are warmer than usual in the South and cooler than usual in the North.
How frequently do El Niño and La Niña happen?
El Niño and La Niña phenomena occur every 2 to 7 years, on average, but they don’t occur on a regular schedule. Generally, El Niño is more common compared to La Niña.
When El Niño or La Niña happen, they typically last about 9 to 12 months, but can last for years at times.
It is also important to note that El Niño and La Niña phenomena do not necessarily alternate with each other. This means we can experience El Niño OR La Niña for several years in a row, which poses a major uncertainty to agricultural activities.
El Niño and La Niña impact on Corn Production
Due to the region where corn is planted in the US, El Niño and La Niña can have a major impact on corn yield.
In the US, most corn production comes from Midwestern states, namely Iowa, Illinois, Kansas, and Nebraska. These states are also called the 'Corn Belt'.
Timing-wise, corn is planted in spring (March – June) and harvested in autumn (Sept – Nov).
When El Niño happens, the Midwestern region where corn is planted will experience generally experience a wetter climate that comes with rainfall, hence making the soil and overall climate condition more favorable for crops to grow.
On the other hand, La Niña tends to cause the weather in the Midwestern region to become dryer than usual, leading to drought that can impact crops negatively.
What does past data tell us about El Niño and La Niña impact on Corn Production?
The graph below shows us corn yield over the past 3 decades in the US, alongside data on whether a particular year experienced El Niño, La Niña, or a neutral transition phase.
From this, we can see that most corn yield during the El Niño years (red dot) is above the yield's trendline (black line).
When we look at the extremes (by referring to the dotted lines indicating +1/-1 standard deviation from the trendline), all 4 very high yield levels occurred in El Niño crop years (1992, 1994, 2004, 2009), and none in a La Niña year.
On the other hand, of 3 very low yield occurrences, 2 happened in neutral years (1993 & 2023) [grey dots] while only 1 happened in a La Niña year (1995) [blue dot].
What we can infer from this, is strong US corn yields occur more frequently during El Niño compared to La Niña, though El Nino does not necessarily guarantee that outcome.
End of 3 consecutive La Niña, return of El Niño
For the past 3 years (2020, 2021, 2022), we have experienced 3 straight years of La Niña, which means 3 years of dry climate in corn-producing states.
As of May 2023, the International Research Institute for Climate & Society is forecasting a high probability (nearly 90% chance) of El Niño happening. In other words, the climate in corn-producing Midwestern states will likely become more favorable for crops to grow.
In fact, the US Department of Agriculture's (USDA) May 2023 crop production forecast already incorporated some of the positive weather developments, projecting a yield of 15.3 billion bushels, which is a 10% growth from last year.
The expectation of a more favourable climate condition (especially compared to the past 3 consecutive La Niña) may also be one of the fundamental reasons why Corn futures (ZC) fails to follow through with its seasonality pattern that trended up from the low in September/October into the subsequent year, unlike the past few years:
Verdict: Take into account of fundamental climate pattern shift while making your trade decision on Corn futures (ZC)
All in all, it is crucial for traders and investors of Corn futures (ZC) to be aware of the fundamental climate pattern shift from consecutive La Niña in the past few years to El Niño in the present day.
I hope this post is helpful in helping you understand the most crucial climate patterns in the world, and in return able to make better trading decisions!
If you have any questions on futures trading, feel free to leave them in the comment section below!
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
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