This study examines how futures contracts on
wheat, soybeans, corn and sugarcane respond to El Nino weather events over the
period March 2010 to April 2024. We use
the monthly ENSO forecast data from the Climate Prediction Center of the
National Oceanic and Atmospheric Administration to benchmark the start of an El
Nino forecast, which we define as the first reporting month in which a current
or forecasted El Nino probability exceeds 50%.
We examine two periods around each event: the six months leading up to
the El Nino forecast, and the six months following the event date. We find that
El Nino weather events have significant effects on commodity futures prices.
Wheat, soybean and corn futures prices (expressed in dollars) generally decline
after an El Nino forecast, consistent with improved harvests due to an increase
in rain. We also find that El Nino
events are associated with increased volatility in commodity futures
markets. Our study can inform hedgers
and speculators who participate in the agricultural derivatives markets, as
well as policymakers who may be interested in initiating or adjusting any
subsidies granted to farmers or food consumers, as compensation for price
pressures.
