Meteorologists now agree that El Niño has arrived and project that it will last throughout the year and be of similar strength to the El Niño of 2009-10.
This will create abnormal weather conditions, which may affect production of a wide range of grains and soft commodities, including in particular corn, wheat, cocoa, coffee, palm oil and sugar, and to a lesser extent rapeseed and soybean.
Current high stock levels, which cover around 20-30% of annual consumption of corn, wheat, soybean, sugar and coffee, may soften the impact of El Niño.
We expect grain prices to edge higher in the coming years with cost inflation and have further revised up our forecasts for corn and wheat prices, reflecting the firmer outlook for El Niño weather.
In our view, prices in the forward market do not reflect the upside risk from El Niño, and we therefore recommend that clients on the consumer side hedge H2 2015 and 2016 exposure at current levels.
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