ERIK NORLAND, SENIOR ECONOMIST AND EXECUTIVE DIRECTORCME GROUP

JULY 26, 2016

La Niña Can Spike Volatility
in Ag Markets

All examples in this report are hypothetical interpretations of situations and are used for explanation
purposes only. The views in this report reflect solely those of the author and not necessarily thoseof CME Group or its affiliated institutions. This report and the information herein should not be
considered investment advice or the results of actual market experience.
Figure 1: The Most Recent El Niño Tied the 1997-98
Episode in Strength but is Rapidly Fading.
El Niño/La Niña: Sea Surface Temp. Anomalies
El Niño

2.5

Degrees Above or Below Normal vs. 30 Year Average

The El Niño of 2015-16 tied the one in 1997-98 as thestrongest on record, with Central and East-Central
Equatorial Pacific Ocean temperatures peaking at 2.3°C
above seasonal norms (Figure 1). Since reaching theirpeak in December 2015, temperatures have begun toslide. In May, they averaged just 0.7°C above normal,
and by July large patches of cooler-than-normal water
had cropped up along the Equator on the Americasfacing side of the Pacific (Figure 2). This begs thequestion: Is the latest El Niño about to develop into a
powerful La Niña? La Niña is associated with cooler,wetter conditions along the U.S.-Canadian border andwarmer, drier conditions in much of the southern UnitedStates, and impacts weather patterns worldwide. Past
La Niñas have roiled agricultural markets, sending crop
prices on wild rides, with prices often moving lower
amid exceptionally high levels of volatility.

221.5

11

95

461273

10118

0.5
0-0.5
-1-1.5LaNiña

4

1
3-2

65

2

78-2.5
1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

2014

Source: NOAA, National Weather Service, Climate Prediction Center

The risk of a La Niña is significant. If one looks at the past
three El Niños that peaked at 2°C or more above normal,
they all transformed into La Niñas within two years, and in
one case (1972-73), in as little as six months.

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JULY 26, 2016

Figure 2: Colder-Than-Normal Water Appearing AlongCentral, East-Central Equatorial Pacific.

However, it should be noted that among the eight previousepisodes of La Niña there had been a wide variety of priceresponses from one episode to the next and from one
product to another. This makes sense to us for several
reasons. First, no two La Niñas are exactly like. Each one
had a differing degree of intensity and a unique duration.
Second, each La Niña had its own specific impact on
temperatures and precipitation in the world’s various crop
growing areas. Finally, each La Niña occurred during its
own set of economic circumstances. The most recent La
Niña in 2010, for instance, occurred at a time when theU.S. Federal Reserve was initiating its (near) zero rates
and quantitative easing policies. Commodity prices andequities markets soared in 2009 and 2010, taking theprices of most agricultural goods higher along with them
despite whatever impact the La Niña might have had.

Since 1959, the world has experienced eight significant
episodes of La Niña and 12 significant episodes of El Niño.
For the purposes of this paper, we consider an episode tobe significant if the National Oceanic and Atmospheric
Administration’s (NOAA) Climate Prediction Center
Oceanic Niño Index (ONI) falls to or below -1°C of normal in
the case of La Niña, and rises to or above +1°C of normal in
the case of El Niño.

Figure 3: Real Spot Price Average Change in 12
months After El Niño/La Niña Crosses 1°C Threshold.

Figure 3 shows what happened, on average, to the
inflation-adjusted spot prices of agricultural goods in the12 months after the past dozen El Niños and past eight
La Niñas reached our significance threshold. The resultis very clear: El Niño tends to be rather bullish for crop
prices whereas La Niña tends to be rather bearish. Soy
products (beans, oil and meal) have all tended to react
more strongly to El Niños and La Niñas than most of theother agricultural goods.

El Niño/La Niña: 1 Year Log Real Spot Returns
25.0%

20.2%

17.4%

20.0%
15.0%

16.9%
13.1%
10.2%

10.0%

8.1%
4.8%

5.0%

9.6%
6.6% 6.1%

2.2%

0.0%
-5.0%

-1.5%
-3.1%
-2.6%
-6.1%

-4.2%

-10.0%-4.8%-10.2%-12.3%-15.0%-20.0%-22.0%-25.0%
ElNiñoCornSoybean Meal
Lean Hogs

Wheat
Rough Rice
Dairy

LaNiñaSoybeans
Live Cattle

Soybean OilFeeder Cattle

Source: NOAA, National Weather Service, Bloomberg Professional (C 1, W 1, S 1, BO1, SM1, RR1, LC1, LH1 andDA1, CPI INDX), Calculations Done by CME Group Economic Research

Figure 4: A Wide Variety of Outcomes From One La Niña to Another.

Change in Inflation Adjusted Spot Prices for 12 Months After a La Niña Passes -1°C Threshold
La Niña
EpisodeBeginning In
Jan '71
Aug '73
Jul '75
Dec '84Jun '88
Sep '88
Oct '07
Aug '10
AverageCorn-28.3%
6.7%-6.5%-10.7%-15.5%
1.1%
8.7%
10.8%
-4.2%

Wheat
-5.7%
-18.6%-14.2%
-4.4%
-0.3%
3.7%
-45.2%-13.4%-12.3%

Soybeans-0.9%-22.1%
7.9%-15.6%-31.3%-8.7%-11.0%
0.3%-10.2%

Soybean Oil-26.2%-34.4%-39.3%-14.3%
4.4%-22.0%

Soybean
Meal

10.1%
-8.9%
-5.8%
-1.5%

Rough RiceLive Cattle

FeederCattleLean Hogs

Dairy-49.0%
26.8%
14.3%
-2.6%

-28.5%-20.5%
-8.7%
-2.1%
8.6%
-9.0%
17.5%
-6.1%

-65.6%
17.5%
-7.7%
8.9%
14.8%
-14.0%
24.6%
-3.1%

10.5%
-1.4%
19.7%
9.6%

-1.8%
-16.8%
4.2%-4.8%

Source: NOAA, National Weather Service, Bloomberg Professional (C 1, W 1, S 1, BO1, SM1, RR1, LC1, FC1, LH1 and DA1, CPI INDX),
Calculations Done by CME Group Economic Research2

JULY 26, 2016

In addition to somewhat lower average prices, the otherkey feature of La Niña is exceptionally high levels of marketvolatility. Realized volatility during periods of La Niña haveaveraged about 1.5x the realized volatility level during
neutral and El Niño periods for corn, soy and wheat. Here,too, however, there are wide varieties of volatility levels
from one La Niña to the next. Generally speaking, themore intense the La Niña episode (the more negative theminimum reading on the ONI), the greater the degree ofvolatility in agricultural goods prices (Figures 5 through 10).
Figure 5: La Niña Often Implies an Exceptionally HighLevel of Corn Volatility.
Corn Futures 1959-2015: Realized Volatility
in 12 Months After El Nino and La Nina Begin

Annualized Standard Deviation

30.0%

27.52%

Figure 6: Stronger La Niñas Often Imply Higher Levelsof Realized Corn Volatility.
Corn: Realized Volatility and La Nina Intensity

Volatility in 12 Months After La Nina Began

40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2

Peak La Nina Intensity in Degrees Celcius Below Normal in Central/East Central Pacific Ocean
Source: Bloomberg Professional (NOAAONI and C 1) for raw data with calculations from CME Group Economics

Figure 7: Soy Volatility Tends to be Exceptionally HighDuring La Niña.
Soybean Futures 1959-2015: Realized Vol.
in 12 Months After El Nino and La Nina Begin
30.0%

26.79%
Annualized Standard Deviation

To the extent that La Niñas follow on the heels of El Niños,
some of the price declines that occur during the ensuing
12 months after a La Niña reaches -1°C below normal
on the ONI might simply represent reversals of priceincreases that took place during the preceding El Niños.
This should come as some comfort to those who areconcerned about the possibilities of further price declines
in the agriculture markets. For the most part, agricultural
goods prices are already trading at low levels. Outsideof soybeans and soymeal, for the most part, agricultural
goods prices did not get a substantial boost out of therecent El Niño. Please see our recent study on the impactof the 2015-16 El Niño.

25.0%

22.13%
20.0%

20.02%

15.0%

10.0%

5.0%

25.0%

20.0%

20.68%

20.04%

0.0%

El NinoLa Nina

Neither

Source: Bloomberg Professional (NOAAONI and S 1) for raw data with calculations from CME Group Economics
15.0%

10.0%

5.0%

0.0%

El NinoLa Nina

Neither

Source: Bloomberg Professional (NOAAONI and C 1) for raw data with calculations from CME Group Economics

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JULY 26, 2016

Figure 8: The Stronger the La Niña, the More Likely
an Exceptionally High Level of Soy Volatility.

Figure 10: The Stronger the La Niña, the More Likely
Exceptionally High Realized Wheat Volatility.

Soy: Realized Volatility and La Nina Intensity

Wheat: Realized Volatility & La Nina Intensity

40.0%

50.0%
45.0%
Annualized Standard Deviation

Annualized Standard Deviation

35.0%
30.0%
25.0%
20.0%
15.0%
10.0%

40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%

5.0%
0.0%

5.0%

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.92

Peak La Nina Intensity in Degrees Celcius Below Normal in Central/East Central Pacific Ocean

Source: Bloomberg Professional (NOAAONI and S 1) for raw data with calculations from CME Group Economics

Figure 9: Wheat Also Tends to be Exceptionally
Volatile During La Niñas.
Wheat Futures 1959-2015: Realized Volatility
in 12 Months After El Nino and La Nina Begin
40.0%

Annualized Standard Deviation

30.0%
25.0%

23.22%

22.86%

20.0%
15.0%
10.0%
5.0%
0.0%

El NinoLa Nina

11.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.92

Peak La Nina Intensity in Degrees Celcius Below Normal in Central/East Central Pacific Ocean

Source: Bloomberg Professional (NOAAONI and S 1) for raw data with calculations from CME Group Economics

Bottom Line:• Past La Niñas have tended to be bearish for crop
prices, but there has been a wide variety of responses
from one episode to the next.
• Crop prices are already fairly depressed, so if a La Niña
develops there is no guarantee that they will fall further.

33.35%

35.0%

0.0%

Neither

Source: Bloomberg Professional (NOAAONI and W 1) for raw data with calculations from CME Group Economics• L a Niña tends to correlate with exceptionally highlevels of volatility in agricultural goods markets that
far outpace realized volatility experienced during El
Niños, and neutral periods, when the ONI is between-1°C and +1°C of its seasonal normal.
• Generally speaking, the stronger the La Niña, the higher
the degree of volatility in agricultural goods markets.

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