This note provides an update to the article “Agriculture, An Alternative Asset Worth Harvesting” which we published on February 22, 2016. In it we stated: “The possible transition from a record breaking El Nino to a La Nina pattern may be a significant variable affecting commodity prices. Understanding this meteorological cycle change can give investors an edge in seeking unique assets with promising risk/reward scenarios”.
In a recent update, NOAA issued a La Nina watch. As we wrote, forecasters were expecting the near-record El Nino to dissipate and the potential for a La Nina event to develop later this summer. That is exactly what is occurring thus far. Investors of wheat, corn and soybeans can have more confidence that the development of La Nina conditions will likely have a negative influence on the aforementioned crop yields potentially resulting in higher prices.
Since February 22nd, corn and wheat have posted marginal gains, while soy has appreciated over 10%. Invesco’s PowerShares DB Agriculture Fund (DBA), which we recommended as a partial substitute for those three specific commodities, is up over 5%. While, there are many factors determining the price of commodities, the following Bloomberg article (link) sheds light on the recent uptick in demand for agriculture commodities and makes mention of the potential for La Nina to lower yields for certain crops.
Further evidence of a La Nina event, coupled with recent weather patterns discussed in the Bloomberg article, have bolstered our confidence in certain agriculture assets. Despite growing evidence in support of our view, we reiterate – “It goes without saying but bears repeating anyway – do your homework on the many variables that affect crop prices and fully understand the risk entailed before transacting”.