The 2023/2024 summer cycle began with the El Niño phenomenon in Brazil. This condition is characterized by the warming of the waters of the Equatorial Pacific Ocean and persists for varying lengths of time.

The effects of the phenomenon affect the commodities market. After all, changes in weather conditions can influence the supply and demand of various agricultural products.

In this sense, it is important to understand the main impacts triggered by the development of crops such as soy, corn, coffee and sugar. The production of these commodities is important not only for the country, but for the whole world.

In addition, risk management plays a significant role in protecting against price volatility. We invited Natália Gandolphi, Market Intelligence Analyst at hEDGEpoint, to explain the main consequences of the El Niño phenomenon for the Brazilian commodities sector.

Read on and check it out!

What are the forecasts for the El Niño phenomenon in Brazil?

In January, El Niño peaks in intensity in the Brazilian summer:

“In Brazil, the phenomenon is associated with drier conditions in some regions, such as the Northeast, and rising temperatures during the summer,” says Natália Gandolphi.

Below, we explain the main El Niño climate predictions in detail. Check it out!

1.    South with rain

The summer should see above-average rainfall. In the west of the region, rainfall will be highest in January and February.

The season is expected to be very sultry, especially in the north of the three states, with rain intensifying due to the heat and high humidity.

2.    Heat and irregular rainfall in the Midwest

Irregularity characterizes rainfall in the Midwest throughout the summer. The smaller number of intense moisture channels makes regular rainfall difficult.

 In Mato Grosso and western Mato Grosso do Sul, rainfall is expected to be below the historical average until March. Temperatures are expected to be very hot, especially in the north and west of Mato Grosso, with a high chance of heat waves in Brazil’s leading soybean-producing state.

3.    Heat waves in the Southeast and Northeast

The summer will be hotter and muggier in both regions compared to last year. January and February should see frequent rainfall in the Southeast, due to the heat and humidity.

In Minas Gerais, rainfall will be very irregular. Heat waves may occur, with a focus on central-eastern Minas Gerais, Espírito Santo, and Rio de Janeiro, in the months between January and February.

In the Northeast, temperatures should be higher than normal in all areas, especially in southern Piauí and central-eastern Bahia. One of the main characteristics of the phenomenon is the lack of rainfall in the region.

4.    North recovers from extreme drought in 2023

In the north, temperatures should be above average in the summer, with intense heat in Pará. Rainfall is expected to be below average, although there is a tendency for the volume of rivers to gradually increase.

In the east and north of the Amazon, the El Niño phenomenon in Brazil has a greater impact. The record drought of 2023 could give way to rapidly rising river levels in the Amazon in the coming months.

Read also:

• The influence of climatic phenomena on the commodities market

How does the El Niño phenomenon in Brazil affect the commodities market?

According to Natália Gandolphi, first-crop crops such as corn and soybeans are likely to be impacted by the weather in all regions this summer. Thus, the phenomenon could affect the planting and development of the crops.

●      Coffee

For coffee, El Niño altered temperatures and rainfall, especially between mid-November and mid-December.

“As the crop is still developing, the full effect of these anomalies is still uncertain. However, the phenomenon influenced the climatic regimes of the Southeast and Northeast and modified ideal conditions for the development of the 24/25 coffee crop in Brazil,” says hEDGEpoint’s Market Intelligence Analyst.

In addition, El Niño has interfered with arabica coffee production in Central America in the past. “This is because it leads to warmer weather during flowering and fruit growth,” says Gandolphi.

●      Grains

In the case of grains, El Niño had negative consequences for production in the Center-North, which caused a crop failure.

“When it comes to soybeans and corn, we need to look at the United States, Brazil, Argentina and the Black Sea. Given the vast expanse of these countries and the difference in the harvest calendar, the effects of the phenomenon vary widely,” explains Natália Gandolphi.

In the United States, for example, El Niño is usually weaker in the summer. Therefore, its impact on productivity is slight. In South America, on the other hand, it brings heat to most of Brazil, with above-average rainfall in the south of the country. In Argentina, the rains tend to intensify towards the end of the year.

“So, the event is usually negative for winter corn, but positive for soybeans and corn in southern Brazil and Argentina during the summer,” Gandolphi explains.

●      Sugar

During the most important sugarcane development window, between December and February, there may be repercussions triggered by El Niño.

“The weather pattern is likely to lead to a reduction in rainfall in the Center-South. Particularly in the north of São Paulo, Minas Gerais, Goiás and Mato Grosso. Despite this possibility, the correlation is lower “, explains hEDGEpoint’s Market Intelligence Analyst.

• Read more: Do you know the role of a market intelligence team in risk management?

Second half of 2024 with a chance of La Niña

There is the possibility of a La Niña forming in the second half of 2024, which is also attracting the attention of the commodities market.

Among the main effects of an active La Niña from June to August is colder weather in Central America, with heavy rainfall. Areas in South America also suffer from colder weather, as well as a drier season in southern Brazil, Uruguay, and Argentina.

In the second half of the year, South America generally experiences hot, dry weather. In the south of the United States, the phenomenon brings drought during the winter. There is also a risk of increased monsoon rains in India.

From now on, we should follow the forecasts and monitor their possible impact on the commodities market.

What is the role of risk management in this scenario?

Risk management cannot prevent bad weather. However, hedging tools help to protect against price volatility caused by variations in supply and demand due to adverse weather conditions.

“The interaction between the weather and commodity futures markets is crucial, as it has repercussions on volatility, which alters the prices of these assets. The uncertainty associated with weather conditions leads to greater speculation in these markets,” explains Natália Gandolphi.

Traders therefore seek to anticipate and react quickly to changes in weather forecasts. The aim is to take advantage of price fluctuations. At the same time, producers and traders use futures contracts to manage the risk associated with weather conditions.

“Due to the significant influence of the weather on the commodities market, the availability of accurate and timely weather information makes all the difference. With this data, market participants make better-informed decisions,” explains Gandolphi.

It is therefore essential to have a partner who understands all the movements that can affect this sector. In this sense, hEDGEpoint combines commodity hedging products, data analysis and market intelligence.

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