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Commodity ETF Opportunities During El Niño


Commodity exchange traded funds may want to take note of what happened during the last strong El Niño weather pattern.

In the last El Niño during the late 1990s, Pacific Ocean water temperatures hit their highest, and now, water in some areas are within 0.9 degree Fahrenheit of previous highs, reports Lucy Craymer for the Wall Street Journal.

The El Niño weather phenomenon brought severe droughts to parts of Southeast Asia and heavy flooding to the Americas in the late 90s.

“From now until December we need to expect dry conditions [in Australia and Asia] but we can’t be sure of the severity,” Agus Santoso, a senior research associate at the Climate Change Research Center at the University of New South Wales, told the WSJ. “The deviation from normal is strong but the impact on rainfall is hard to predict.…Farmers need to be prepared emotionally and financially.”

If the last El Niño is any indication, nonfuel commodity prices could rise in the months ahead. According to the International Monetary Fund, nonfuel commodity prices jumped an average 5.3% in the 12 months following the announcement of an El Niño event as the threat of lower production brought on by inhospitable conditions weighed on prices.

For instance, in India, the reduced monsoon rains could lead to lower sugar crops. Additionally, wet conditions in Brazil could also dent sugar harvests there. Investors can track sugar prices through the iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (SGG) and the Tecrium Sugar Fund (CANE) .

Lower precipitation and droughts across Australia could decimate wheat and other crops. The Teucrium Wheat Fund (WEAT) is the only ETF to track wheat price movements. [Extended El Niño Could Sustain Grains Commodity ETF Rally]

The dry weather could also mean less water to run hydro-powered mining equipment in Indonesia, the largest nickel producer in the world. The diminished production would affect nickel exchange traded notes, including the iPath Dow Jones-UBS Nickel Total Return Sub-Index ETN (JJN) and iPath Pure Beta Nickel ETN (NINI) .

Below-average rainfall in coffee-growing Vietnam, Indonesia and Central America could lower crop yield expectations. Warm weather could reduce the risk of frost in Brazil, the largest coffee producer in the world, and could diminish crop output as well. The iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (JO) and iPath Pure Beta Coffee ETN (NYSEArca: CAFÉ) track coffee prices.

Lastly, wetter conditions in Chile, the world’s largest copper producer, could lead to flooding in copper mines, which would impeded supply. For copper exposure, look to the iPath Dow Jones-UBS Copper Subindex Total Return ETN (JJC) , iPath Pure Beta Copper ETN (CUPM) and United States Copper Index ETF (CPER) .

For more information on the commodities market, visit our commodity ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.