May twenty-first, twenty twenty-six
“On El Niño and Agricultural Commodity Investing”
《On El Niño and Agricultural Commodity Investing》
Author: Ariston
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Agricultural Markets: Three Investment Rationales
There are three main themes in agricultural markets:
1) Rising fertilizer costs, 2) demand growth from biofuel blending, and 3) El Niño disrupting supply.
The first theme: fertilizer:
Since disruptions in the Strait of Hormuz, nitrogen fertilizer prices have risen by about 50%-60% relative to their pre-conflict levels. Even if the strait reopens tomorrow, that does not necessarily mean fertilizer prices will fall quickly. High fertilizer prices matter because, beyond simply squeezing profits, they also change planting behavior.Fertilizer accounts for about 60% of U.S. farmers’ variable costs. The share may be higher in Brazil and India, where labor makes up a smaller proportion of costs and fertilizer therefore carries more weight in the cost structure. This means farmers in Brazil and India are more likely than U.S. farmers to cut fertilizer use in response to price pressure.
The real risk is the combination of reduced fertilizer use and bad weather. If weather conditions are favorable, cutting fertilizer use may not immediately lead to a noticeable drop in production. But if reduced fertilizer use coincides with abnormal weather brought on by El Niño, it would create a classic perfect storm. This is where the market is currently and significantly underestimating the risk.
In the U.S., the risk is less about lost production and more about switching between crops. Spring planting is now underway, with roughly two-thirds of the corn and soybeans planted. Corn is more dependent on nitrogen fertilizer than soybeans. Over the next two weeks, it will be important to watch whether farmers really do switch some of the corn they had planned to plant to soybeans because nitrogen fertilizer is expensive.Most of the nitrogen fertilizer for this U.S. growing season was purchased earlier, so the current conflict in the Middle East has a limited direct impact on North American acreage and yields this season. The more concerning 26-27 is this window.
Chart: ZS/ZC (daily chart, as of 260521)
Brazil’s risk window is more concentrated in the next crop season. Planting for the main soybean crop generally begins in 9, and farmers are already buying fertilizer for the season ahead. Corn, cotton, and other crops also face another round of input decisions.For now, Brazilian farmers have not completely missed the purchasing window. But if disruption in the Middle East continues, the issue ahead will be not only costs, but also tight supply and insufficient application.
Figure: Differences between crop farming in the United States and Brazil
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The second main theme: biofuel demand:
In the United States, if the E15 is ultimately implemented over the course of the year, it would be positive for corn demand. In Brazil, the direction of E32 is positive for both sugar and corn, since both can be used to produce ethanol. Countries including Vietnam have also been mentioned as considering similar policies.
Figure: In a market dominated by sugar and corn, some new projects in Brazil are seeking to produce ethanol using feedstocks such as wheat and soybeans (https://newsletters.brazilian.report/p/biofuels-ethanol-corn-soybeans-sorghum）
To some extent, the core tension in Brazil’s sugar and ethanol chain is not the direction of sugar prices, but the sharp deterioration in ethanol profitability. This is the fundamental reason why the outlook is bullish for sugar itself, but sugar and ethanol stocks are not uniformly optimistic. At the start of this crushing season, domestic ethanol prices in Brazil fell rapidly, continuously weighing on companies’ ability to realize profits.
The short-term pressure on Brazilian ethanol mainly stems from two factors. First, gasoline prices have not risen significantly, limiting the scope for ethanol prices to increase at the retail level. Second, the Brazilian real has strengthened. For Brazil’s export-oriented agricultural and sugar and ethanol companies, revenues are essentially pegged to the US dollar, so a strong real is usually a negative, not a positive.
Brazilian sugar companies therefore face a typical disconnect: the commodity outlook is bullish, but that is not translating smoothly into stock performance. Even if sugar prices have medium-term upside potential, stocks may not benefit in tandem if ethanol prices remain weak, the exchange rate is unfavorable, and the companies themselves are highly leveraged.
Figure: TTEN3 (daily chart, as of 260521) More integrated companies with better-hedged operations of this kind may outperform the sector to some extent. They are involved in multiple areas, including agricultural inputs, trading, and industrial operations, rather than being exposed solely to crop prices or the price of a single input, and they have healthier expansion strategies and balance sheets. By comparison, pure-play farming companies or highly leveraged entities face greater uncertainty going into the next season.
Figure: SLC Agricola (daily chart, as of 260521) SLC The problem for large Brazilian farming companies of this kind is that planting for many crops this season has already been completed. Inputs, fertilizer purchases, foreign exchange, and leverage for the next season are all uncertain, making it difficult for them to sustain a premium.
As for India, because of its subsidy system, farmers are less sensitive to high fertilizer prices than their counterparts in Brazil. It is not appropriate to assume simply that high prices will lead to less planting and fertilizer application. The greater uncertainty in India lies in the weather. Even with subsidies, if yields weaken because of weather, sugar supply will still tighten. India’s sugar output this season, which is well below some earlier optimistic expectations, is a case in point.
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The third main theme is El Niño:
According to NOAA, the probability of El Niño occurring is extremely high, and the probability of a strong El Niño is also significant. Historical experience suggests that it is typically associated with drier conditions in India and Southeast Asia, and wetter conditions in some parts of South America.Sugar and cocoa are the most sensitive here, especially sugar supply in India and Thailand, and cocoa supply in West Africa.
First, sugar. Sugar is one of the clearest bullish expressions under this theme, since it is exposed to several influences at once: fertilizer, weather in India and Thailand, and policies driving ethanol blending:
Figure: Sugar (daily chart, as of 260521)
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Next, cocoa. West Africa, particularly Côte d’Ivoire and Ghana, is highly sensitive to a strong El Niño. In the past, strong El Niño episodes, combined with dry conditions and wind damage, have caused significant supply losses. Cocoa is one of the commodities most vulnerable to weather disruptions:
Figure: Cocoa (daily chart, as of 260521)
We flagged the key upside breakout from the previous cycle’s low on the platform. At present, for the daily chart to turn bullish again, the price needs to move back above 4220; for the hourly chart to turn bullish, the price needs to return at least to 4030 (yellow line).
Figure: Cocoa (hourly chart, as of 260521)
By comparison, wheat has less concentrated El Niño exposure because global supply is more diversified.The United States and Canada may benefit in some scenarios from milder winters and better weather, while Australia and the Black Sea region may come under pressure. Therefore, it is difficult to form a clear one-way trade like the ones in sugar and cocoa.
Figure: CTVA (daily chart, as of 260521) If corn and soybean prices continue to rise and the weather strengthens farmers’ need to protect yields, then CTVA’s seed business will be a more direct beneficiary. The bullish reversal level is at the yellow line.
Chart: SDF (daily chart, as of 260521) Potash has not been significantly disrupted like nitrogen fertilizer, and prices have not surged out of control. It is currently the most affordable of the three major nutrients. At the same time, although potash application can be deferred to some extent, farmers have already deferred application once over the past few years, so demand is currently proving stronger than the market expected.
A moderate El Niño in the south could increase precipitation and benefit some crops, but a strong El Niño could develop into flooding; in the Midwest, the main effect would be greater instability in the distribution of precipitation. Therefore, Brazil should not be traded as a single, uniform direction; it depends on the region, crop, and intensity.
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Note: All content in this document is for reference only. It does not constitute any investment advice, nor does it serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on such information as the basis for decision-making.
Note: All content in this document is for reference only. It does not constitute any investment advice, nor does it serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on such information as the basis for decision-making.