How Do Futures Contracts on Agricultural Commodities Respond to El Nino Weather Events?

Abstract

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.