You've probably heard of the terms El Niño and La Niña but what are the causes of these climate phenomenas and what do they have to do with global commodity markets? 

To put it bluntly, only a few degrees change in Pacific ocean temperatures can devastatingly shift global weather patterns from Australia to South Africa to Brazil and many places in between.

It can cost lives from crippling droughts and floods and debilitate economies. It also impacts a range of commodity markets from the Australian water market through to the price of nickel and coffee.

The whole cycle of warming and cooling in the Pacific Ocean is known as El Niño-Southern Oscillation (ENSO). El Niño is the term coined to describe the Pacific’s warm phase while La Niña is the cooling event. There is also a neutral phase in between. The whole cycle tends to unfold every two to seven years.

Lets dive in further with a primer on the Walker Circulation which is the driving force behind ENSO.

The Walker Circulation

The Walker Circulation describes the scenario where air travels across the Pacific Ocean and rises when it gets to Indonesia.

That air then circulates back across the Pacific before moving down to land mass in Central America. That’s the neutral phase and the common phase.


La Nina Definition
Source: BOM

La Niña

The La Niña phase is the intensification of the Walker Circulation. Trade wind velocity increases and sea surface temperatures in the central and eastern tropical Pacific Ocean are cooler than normal.

Depending on the time of the year, La Niña is normally associated with higher than average winter, spring and early summer rainfall over much of eastern Australia.

Source: BOM

Effects of La Niña extend to all corners of the globe. It generally induces flooding across Asia while wet and cool conditions in southern Africa may also help boost the size of the global sugar cane crop, spelling bad news for sugar prices.

La Niña Impact on Global Climate

La Nina Effect

 Source: International Research Institute for Climate and Society

Historical Impact of La Niña on Australian Rainfall

La Nina Australia
Source: BOM

El Niño

The El Niño Phase is typified by warmer than normal sea temperatures in the central and eastern tropical Pacific Ocean and this causes a shift in atmospheric circulation. Typically, equatorial trade winds blow from east to west across the pacific ocean. In an El Niño event, these trade winds can weaken or even reverse.

el nino definition

Source: BOM

El Niño Impact on Global Climate

el nino effect

  Source: International Research Institute for Climate and Society

Historical Impact of El Niño on Australian Rainfall

el nino australia effect
Source: BOM

An El Niño event has the potential to devastate global commodity markets. In the twelve months from April 2015, a strong El Niño had far reaching consequences. A lack of rainfall across southern Australia ignited values in the Australia water market, rewarding investors seeking uncorrelated returns from an alternative asset class.

2015 El Niño Impact on Australian Rainfall

el nino 2015
Source: BOM

South Africa battled their worst drought in over a century, the UN estimated that 32 million people in the Southern African region faced a severe shortage of food while in Zimbabwe, corn production plummeted 40% year on year.

2015 El Niño Impact on South African Density of Plant Biomass

NASA's MODIS satellite imagery from early 2016 shows that Normalised Difference Vegetation Index (NVDI) readings were much lower than normal suggesting a lack of plant vegetation and hence, a large decline in corn yields.
el nino south africa
Source: NASA
Elsewhere, the Malaysian palm oil market rallied over 50% from late 2015 to the end of 2016 as production in the two largest producing countries declined significantly. It was a similar story in sugar which rallied over 100% in that time as the Indian sugar cane crop came under severe duress.

Is Climate Change Affecting the ENSO Cycle?

The scientific community continues to debate whether global warming is affecting the frequency or intensity of the ENSO cycle, but there remains no clear consensus.

Published research in 2013 noted that evidence from a study on coral skeletons indicated that El Niños had intensified and cautiously linked that to climate change. A few months following the release of that study, scientists predicted that the frequency of El Niños would double due to climate change.

The US government meteorologist Tom Di Liberto recently balanced that view by stating that there was not enough evidence yet to suggest that El Niños would become more common due to climate change.

What does remain clear is the significant affect that the El Niño Southern Oscillation (ENSO) phenomenon contributes to seasonal climate fluctuations across the globe, often with severe social and economic implications for human populations, the environment and global commodity markets.

More Information on ENSO