El Nino Risk Seen Underpriced as Noble May Advance

Palm oil, sugar, cocoa and wheat are among crops that may be most hurt by an El Nino this year, according to Barclays Plc, which said commodity markets haven’t fully priced in the risks.

About a 20 percent probability of a strong El Nino is reflected in soft-commodity markets, compared with the 60 percent to 70 percent odds seen by meteorologists, analysts led by Ephrem Ravi wrote in report today. The weather pattern may boost earnings at companies from Noble Group Ltd. to Wilmar International Ltd. and their shares may rally, Ravi wrote.

El Ninos can roil agricultural markets by parching parts of Australia and Asia while bringing rains to South America, and Australian forecasters issued an alert this week saying the event may start in July. ABN Amro Group NV said that a confirmation may trigger support for coffee, sugar and cocoa.

“We are not meteorologists and have no view whether El Nino will definitely occur,” Ravi wrote, while describing the discrepancy between the predicted odds for an El Nino and soft-commodity pricing as surprising. An “increase in soft-commodities prices is obviously good for the earnings and cash flows of the upstream producers.”

Palm oil futures traded at 2,559 ringgit ($789) a metric ton on Bursa Malaysia Derivatives at 3:45 p.m. in Kuala Lumpur, 3.8 percent lower this year. Sugar rose 4.6 percent in New York, while cocoa gained 7 percent. Arabica coffee surged 81 percent, the best-performer in the Standard & Poor’s GSCI gauge of 24 commodities, because of drought in Brazil.

Warmer Years

El Ninos, which are caused by the periodic warming of the tropical Pacific Ocean, occur every two to seven years and are associated with warmer-than-average years. The last El Nino was from 2009 to 2010, and since then the Pacific has either been in its cooler state, called La Nina, or neutral.

Soft-commodity prices rally on average by 10 percent to 40 percent during El Ninos, according to Barclays, citing six events since 1986. Sugar and coffee prices rose the most during those episodes as the production is concentrated in areas where El Ninos have the most impact, the bank said, listing Southeast Asia, India and South America.

An El Nino may hurt palm oil yields, potentially following damage caused by dry weather in Indonesia and Malaysia in the first three months of the year, Barclays said. Over the past three events, prices advanced an average of 32 percent, it said.

‘Upside Opportunity’

Shares of Singapore-listed Wilmar, the world’s largest palm oil processor, advanced 1.2 percent to S$3.34, paring this year’s loss to 2.3 percent. Noble, Asia’s biggest commodity trader by sales, rose 0.4 percent to S$1.25, taking this year’s advance to 17 percent.

Golden Agri-Resources Ltd., the biggest palm oil producer in Indonesia, may benefit from an El Nino as higher prices more than offset lower output, Barclays said. Its shares have risen 8.3 percent to 59 Singapore cents this year.

“There is still significant upside opportunity in Noble, Wilmar and Golden Agri,” Ravi wrote. Trading companies may benefit from increases in volatility and sourcing commodities from non-traditional areas, according to the report.

El Nino may develop as soon as July, the Melbourne-based Bureau of Meteorology said on May 6, citing forecasting models. There are signs an El Nino is imminent, the United Nations’ World Meteorological Organization said on April 15, and the U.S. Climate Prediction Center on April 10 put the chances at 65 percent, up from 52 percent.

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