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Commodities

Will El Nino's sister hold sway in 2016?

The El Nino phenomenon caused extreme conditions worldwide in 2015, including a drought in Makassar, Indonesia. (Getty/Kyodo)

SINGAPORE -- The El Nino weather phenomenon wreaked havoc worldwide last year. Its counterpart, La Nina, could cause more trouble in 2016.

    The term El Nino, Spanish for "the boy," was coined by Peruvian fishermen to refer to a warm ocean current that typically arrives around Christmas time. This warmth affects weather around the globe. Last year, it was blamed for droughts in Thailand and Indonesia, among other extreme conditions. 

     La Nina, or "the girl," refers to lower water temperatures off the western coast of South America. In Asia, this can cause unusually cold weather and heavy rains. 

     La Nina's impact in 2010 and 2011 could hint at what is to come. The effects of the phenomenon pushed up corn futures prices to more than twice the current level, and wheat to nearly twice the present value, on the Chicago Mercantile Exchange in 2011 and 2012. 

     In places where personal incomes are relatively low -- such as emerging Asian countries -- rising food prices can destabilize the economy and society. Some experts contend that the Arab Spring uprisings in the Middle East and North Africa in 2011 were triggered by La Nina-driven inflation.

Reassuring forecast 

Today, some Asian market watchers see little cause for serious concern. Michael Coleman, managing director of commodity-focused hedge fund RCMA Asset Management in Singapore, said La Nina is unlikely to cause the same grain price surge this time, and will have only a small effect on Asian economies. 

     When the 2010 to 2011 La Nina drove up grain prices, Asian and other emerging economies were looking robust. Stock prices were rising. Grains grew more expensive not just because of irregular weather but also increased demand for livestock feed, since people in fast-growing economies were consuming more meat.

     In fall 2010, the U.S. Federal Reserve implemented its second round of quantitative easing, sending excess funds flowing into commodities. 

     Things are different now. The Fed in December raised interest rates for the first time in about nine and a half years. This has drawn money out of commodities.

The earnings angle

Stable or declining food prices are good news for consumers but not necessarily for stock markets. Agricultural companies, including Asian ones, face sluggish earnings and skeptical investors.

     Olam International, a Singapore-listed agricultural commodities trader, announced on Jan. 11 that it had acquired Nigerian milling company Amber Foods. On the stock market, the company's shares started off strong that day but soon lost steam.

     In late November, Felda Global Ventures Holdings, a leading palm plantation operator in Malaysia, scrapped a plan to purchase a stake in Indonesia's Eagle High Plantations, saying it needed to rethink the deal.

     The stocks of Singapore-based Wilmar International and other agricultural companies have been weak, too.

     There is still a chance that La Nina could propel grain prices higher. Akio Shibata, president of the Natural Resource Research Institute, warned that during the transition from El Nino to La Nina, the grain supply-demand balance could tighten sharply. This is because the U.S. -- the main producer of soybeans and corn -- could be hit by droughts. Once that balance tightens, speculative money could again flood the commodities markets.

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