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Look Out for El Niño’s Sister, La Niña

El Niño has grabbed all the news headlines recently, in large part because of an unbelievably mild start to winter in the United States.

In addition to saving consumers money with lower heating bills, El Niño has also lowered food costs. Beneficial rains and cool summers linked to El Niño have led to bumper grain crops in the United States and South America.

But scientists say a rapid cooling is occurring in central and eastern Pacific Ocean waters – which means El Niño is dying.

The question now is whether the water temperatures will return to neutral or if they’ll cool enough to form a La Niña.

La Niña on the Way?

A La Niña effect doesn’t always follow an El Niño, but it often does. The Japan Meteorological Agency says that a La Niña has followed 11 of the past 15 El Niños.

U.S. weather service Commodity Weather Group warns that since 1950, the three strongest El Niños all rapidly transitioned to a La Niña. And we’re currently experiencing the strongest El Niño on record.

For the United States, El Niño’s sister, La Niña, could be nasty.

The grain-growing breadbasket in the Midwest is usually hit by very hot and very dry weather in the summer. La Niña can also cause colder-than-normal winters, sending your heating bills skyward.

But the biggest effect of a potential La Niña event will definitely be on soft commodity prices – particularly grains.

The farmers could use the help. Bumper crops the past three years have sent prices spiraling down to multi-year lows. Fortunately for the farmers, history is on their side:

  • In 1983-84, an El Niño transitioned to a La Niña during the crop year. Corn production that year fell by nearly half, to its lowest level in 13 years. The soybean crop output also fell to a seven-year low.
  • In 1988, La Niña rapidly followed El Niño, triggering one of the most widespread droughts the United States had ever experienced. Farmers are still talking about that one.
  • In the last La Niña in 2012, corn yields fell to a 17-year low at 123.4 bushels per acre.
  • Other countries in the Americas are affected, too. In 2008-09, Argentina saw soybean production fall by 30%.

Grain prices are approximately 50% higher during a La Niña compared to more normal weather, Erik Norland of the CME Group Inc. (CME) told The Wall Street Journal.

And it’s not just grains, either. Brazil would also feel the effects of the La Niña, meaning sugar and coffee will also be impacted. A year after the latest La Niña was confirmed in July 2010, wheat was up 21% and soybeans were up 39%. But sugar soared 67%!

La Niña Plays

How can investors make money from this natural phenomenon?

First, look to see in March or April if the rapid water-cooling in the eastern Pacific has continued. If so, that means La Niña will be here sooner than expected. If not, then La Niña is more likely to hit in late 2016 or early 2017.

If La Niña does occur, grains will benefit along with cotton, sugar, and coffee.

Speculators could even jump in now. These crops are all priced as if benign weather conditions will prevail forever, which it obviously will not.

For investors not inclined to deal with futures, and options on futures, the best bet is to use exchange-traded products. Here are some possibilities:

  • For coffee, try the iPath Bloomberg Coffee Subindex Total Return ETN (JO).
  • For cotton, check out the iPath Bloomberg Cotton Subindex Total Return ETN (BAL).
  • For sugar, the iPath Bloomberg Sugar Subindex Total Return ETN (SGG) is a good bet.
  • For wheat, try the Teucrium Wheat Fund (WEAT).
  • For soybeans, check out the Teucrium Soybean Fund (SOYB).
  • And for corn, try the Teucrium Corn Fund (CORN).

These should all benefit if La Niña does pay us a visit and decides to stay a while.

Good investing,

Tim Maverick

Tim Maverick

, Senior Correspondent

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