Societe Generale slapped a buy rating on new crop corn and wheat futures, citing the increased likelihood of La Nina year in 2016.
The La Nina effects is bought about by a cyclical cooling of the Pacific, and frequently follows on the heels of El Nino, when Pacific temperatures are above normal.
“La Nina’s impact on commodity markets is generally more defined and focused than the impact of El Nino,” said Societe Generale.
Taking into account the currenct El Nino effect, Societe Generale pinned the likelihood of a La Nina event over the next 12 months at 89%.
And the bank said the effect could manifest in as little as three months.
In particular, La Nina is associated with cool, dry weather in North America and the west coast of South America, which would threaten crops in those regions.
Corn crop threatened
Taking the risk of El Nino into account, Societe Generale suggested that the July 2016 corn contract, which marks the start of the US corn marketing year, “could see the greatest increase in price”.
“In the event of a La Nina event occurring in the winter of 2016-17, this would have the greatest impact on the Argentinean and Southern Brazilian corn crops due to an increased drought probability.”
“To capture any potential impact to the South American crop, a long position in the March 2017 corn contract, also currently trading at a discount to our forecasts, could see increased upside potential due to an increase in US export demand,” the bank said.
And the September wheat contract was also seen benefiting as well.
“Dry weather in the US could affect the development of the US winter wheat crop which should support the September 2016 wheat contract in particular.
As with corn, Societe Generale saw other market fundamentals exacerbating the price effect.
“The risk with wheat in particular, due to the amount that is exported, is the dollar strength reducing export competitiveness for US grades and already high global stocks.”
Stocks buffer soybeans
Societe Generale was neutral on soybean futures, noting that “from a risk-adjusted perspective, corn looks a more compelling trade due to our more bullish fundamental outlook.”
If La Nina were to manifest, the bank saw the July soybean contract to experience the most upside.
“But considering the high level of global soybeans stocks, it would have to be a very strong La Nina event to have a meaningful price impact.”
La Nina looms
On Tuesday Kyle Tapley, of MDA Weather services, said that a transition to La Nina was “the most likely scenario later this year”.
Mr Tapley said the prospect of La Nina would “move to the forefront,” in late spring of this this year.
However, Richard Feltes, of RJ O’Brien, took a more downbeat approach to the potential for the weather pattern boosting grain prices, at least short term, “everyone from large banks to small CTAs are well aware of potential for adverse US summer weather if El Nino transitions rapidly to La Nina”.
Societe Generala also flagged the potential for La Nina to support coffee prices.
“Historically, coffee has been very vulnerable to La Nina due to the increased likelihood of rainfall in Columbia leading to crop damage via the spread of a tree fungus that thrives in damp conditions,” the bank said.
And energy commodities could be lifted, thanks to increased heating gas demand in North America, and flooding of coal mines in Australia, the banks said.