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Weathering an Investing Storm: What's Coming With El Niño?

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September 21, 2015
Godzilla El Niño could affect commodities

They call it a Godzilla El Niño. But before you start making popcorn for a night in front of a chilling horror flick, savvy investors may first want to explore the impact of potential dramatic weather shifts on food and agricultural stocks.

The winds of production could change during a time when farmers are already reeling from a worldwide retreat for commodities prices, including crops.

"They are forecasting the strongest El Niño in 50 years. This is big for commodities," says John Kleist, head strategist at E-BOT Trading LLC. If El Niño's force disrupts Mother Nature's key corn and soybean growing seasons in South America this winter or North America next spring, commodity prices could see a jump, which in turn could impact a wide array of food and agricultural stocks.

What’s the Forecast?

Scientists have been tracking a rise in sea surface temperatures in the equatorial Pacific, which could trigger a worldwide domino impact on weather patterns. Farmers are bracing for this Godzilla El Niño to potentially wreak havoc on commodity crop growing seasons. There’s a greater than 90% chance that El Niño will continue through the northern hemisphere's winter 2015–16, according to the NOAA Climate Prediction Center.

Looking ahead, El Niño could throw a wrench into next year's spring planting season in the U.S., with an 85% chance it will last into early spring 2016.

Select Sectors

Here's a look at select stock sectors that Godzilla El Niño could impact.

1. Seed companies. This group includes Monsanto (MON), Dow Chemical (DOW), and Dupont (DD), among others. If unfavorable weather patterns were to hit corn and soybean crops during the South American growing season, it would be negative for yields and positive for prices, analysts say. U.S. farmers may be encouraged to plant even more aggressively during the U.S. spring planting season if commodity prices turn higher. "Seed companies could be a major beneficiary of crazy weather patterns," says Bill Selesky, senior research analyst at Argus Research.

2. Farm equipment makers. These companies include Deere (DE), Caterpillar (CAT), and AGCO Corp. (AGCO). Record-size U.S. corn and soybean crops in recent years have pressured commodity prices to multi-year lows in some cases. Global demand remains strong for food commodities, but record crops have left inventories at high levels, tilting the balance, in the eyes of some observers, toward lower prices.

Considering the high cost of combines and tractors, farmers tend to delay purchases until periods of rising commodity prices. Farm equipment makers have seen a decline in new farm equipment sales in recent years.

"Farmers tend to be very frugal. As crop prices have been falling and falling, farmers have been reluctant to plunk down money to buy new equipment," Selesky says. "If they thought that prices would go substantially higher, they may start buying new farm equipment.”

"If we see a rise in grain prices, it will directly impact farm machinery sales," agrees Kleist.

3. Fertilizer companies. CF Industries (CF) and CVR Partners (UAN) are examples of fertilizer company stocks that could potentially see increased demand in a rising commodity price environment, say analysts. "If farmers are thinking they need to plant a lot of acreage, they will buy more fertilizer," Selesky says.

4. Biotech sector. El Niño and its potential to change weather patterns may not have a direct impact on the biotechnology, specifically the bioseed, sector, analysts say. Bioseeds often offer farmers the ability to generate more yield through the same amount of seed, or more "bang for the buck," which is an attractive feature no matter what the weather forecast.

"Farmers have been buying biotech seed, because even though it is more expensive, it produces more crops. The farmer wants to get as much yield out of [the] acres as possible," Selesky says.

More Mouths to Feed

Our planet is home to about 7.2 billion humans right now, and world population growth is increasing at an explosive rate. The United Nations forecasts more than 9 billion people will be walking earth by 2050.

For commodity prices and food and agricultural stocks, this boils down to the potential for more demand. Stock investors can look beyond the current El Niño and think long term regarding this sector, especially with a focus on companies feeding a research and development platform.

"El Niño is a temporary condition that might hurt or help companies in the short term. But in the long run, the growth demographics of world population means we will need improving crop yields to keep up with population demands," says Christopher Muir, senior industry analyst at S&P Capital IQ.

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