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The HC Commodities Podcast
The Coming El Niño with Michael Ferrari
00:53:04
Today, we discuss El Niño - the dramatic, periodic, shift in climate patterns, that depending on intensity and duration can have profound impacts on our world, economies, and the commodities sector. And as of right now, we are back in an El Niño and it is expected to be one of the strongest on records. What are the known impacts? And how might the state of the world today, with the closure of the Strait of Hormuz, exacerbate those impacts? And what could happen if we hit Super El Niño territory? Our guest is Michael Ferrari, head of research at Moby, an AI native investment platform targeted to retail investors. Michael has previously been on the show and has a stellar career at the center of data, analytics, insight, and building platforms to support that in various roles in such companies as Coca-Cola, Syngenta, Engine No. Point72, and latterly at AlphaGeo.
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- [00:00]
A
Foreign. Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we're talking El Nino, a dramatic shift in climate patterns that, depending on intensity and duration, can have profound impacts on our world economies and the commodities sector. And as of right now, we are back in El Nino and it is expected to be one of the strongest on records. What are the known impacts and how might the state of the world today, with the closure of the Strait of Hormuz, exacerbate those impacts? And what could happen if we hit Super El Nino territory? Our guest is Michael Ferrari, who's currently built and running the research platform at mobi, an AI native investment platform targeted to retail investors. Michael has previously been on the show and has a stellar career at the center of data analytics, insight and building platforms to support that at various public companies and commodity houses such as Coca Cola, Syngen 72 and latterly at Alpha Geo. As always, you can really support the show by leaving us a positive review on the platform. You're listening on. And as always, I hope you enjoy the episode. Michael, welcome back to the show.
- [01:36]
B
Are you having me, Paul?
- [01:38]
A
So last time we had you on the show, we discussed kind of geographical arbitrage and sort of how important location was now in terms of citing assets, insurance and all that world. And people should go back and have a listen to that episode. I think it stands up very well given events since. And what we're about to talk about, and what we are about to talk about is El Nino, which is certainly a growing story with profound impacts, both short and long term. We're going to talk about what is El Nino, the Southern Oscillation, how is it created, what's its typical impacts, and then how intensity and duration can really shape our modern world and the commodities sector in particular. So delighted to have you on. Should we start? Let's start at the very start, I guess. Michael and what is El Nino?
- [02:35]
B
I'll start off by saying that no two El Ninos are alike. But in general, kind of the physical mechanism behind El Nino is we have a shift in the trade winds. So typically the typical trade winds across the equatorial Pacific are moving westward. So they move from North America towards Asia. And in domino event, we have reverse. So the trade winds shift, the driving forces are going west to east. And then in conjunction with that, we have a warming of the Pacific Ocean, typically at the surface. But as we'll talk about probably over the course of this conversation, it starts from subsurface and the subsurface warms and then you have this large mass of warm water that migrates westward to eastward. And so what that does, it does a lot of things. It basically becomes a steering current for what happens for any atmospheric process that's going to occur at a large scale. So it's kind of the guardrails between the likelihood of certain types of seasonal and sub seasonal weather patterns to develop. And then of course, along with that there's, what we try to do is we look at the strength, the intensity. There's a lot of hundreds of physical variables that we might look at during El Nino and then try to put together what are the analog years or what other years kind of had a similar profile. But at a large scale, the primary effects that we look for is, you know, more heat and more heat is moving eastward. So the Americas, you know, parts of the Americas will receive kind of a, more of a warmer pattern that'll materialize following the event. And what it also does is it drives a lot of the precipitation that's normally available for Asia and Southeast Asia. It moves away. So that actually becomes more dry. And a lot of that will be typical for a convection pattern in Asia. A lot of that precipitation energy starts to move eastward. So you're kind of pulling that away. And so it's dryness. And then a lot of that precipitation manifests itself throughout the Americas. And then there's of course a bunch of other splong effects, but that's kind of, those are the large mechanisms. And of course, we'll talk about some of the specifics during this conversation.
- [04:32]
A
Yeah, so this is, I guess, periodically recognized throughout history and named the, the Child by Peruvian fishermen, whatever it would be, which would be at uncertain times. But over a sort of decades long cycle, you'd have this, you'd go from cool cold waters off the eastern Pacific coast to very warm and you'd have a commensurate dramatic change in climate regionally. And this is, as you say, those trade winds, so normally pushing the warmth and rain westward into Indonesia and Singapore and the, you know, and, and hence that typical climate over there. You get this sudden reversal. And, and I, and I don't think I'm wrong in thinking that this time they associate that with a couple of cyclones that were sort of paired over the equator in, in, in Asia, in the Asia Pacific region six months ago, a year ago, whenever it was, and kind of stopped the trade winds for like long enough that this trend all started. And the story here is kind of one of intensity and duration. I think we're officially now in El Nino. There are some predictable outcomes when we are in one, avoiding kind of like the. Is this going to. Is certainly this is going to be a very strong El Nino. We have yet to see whether it's going to be a super El Nino. And also critically, we don't know its duration. The last one, we sort of big one we had a really big one which turned off quite dramatically and somewhat surprisingly was 23, 24. There was similar scale ones in 1996. But people can go back and look at that data and I encourage people to do. But generally speaking, let's sort of go region by region. So in El Nino, whether it's however long it lasts, six months to a year to two, three years, whatever it might be, this is a period of there's some really related impacts. So one of you mentioned is a drier, a drier Asia Pacific region. Right. So all of those sort of. Well, you. What, what are the known sort of impacts?
- [06:42]
B
A couple of things. And I'll just go back to a piece you touched upon that is important. The ENSO cycle. It is just that it is a cycle. And the El Nino phase of the cycle, typically that can be, you know, there's been times where it's been as short as eight months, sometimes it's two years. But there's different parts of the cycle. So if you kind of break it into segments and this kind of helps for stratifying. When we look at analog years, you kind of have the development of an El Nino. So that's kind of the acceleration cycle. You have the El Nino itself, which is another phase. You have the declining phase, the neutral phase, and then kind of the three flip phases on the La Nu side. So it's not. A lot of people just like to look at El Nino, La Nino neutral. So it actually is more than that because as we're moving into an El Nino, it is different than it would be the conditions that when the event itself is receding. So we kind of have anywhere from five to seven individual regimes. And if there's large scale characteristics. So like right now we're in the El Nino, as you mentioned, if there are characteristics that are typical, and again, I'll probably say this several times throughout the discussion, there are no, no two El Nino events are alike. But if there are typical events that kind of manifest themselves regularly, we can kind of start with, as I was mentioning earlier, you have precipitation Moving out of Southeast Asia and Asia PAC at large. So India has a higher likelihood. And when we're talking about commodities, obviously India is the number one or two grower. Almost every agricultural commodity in the world, we start to see major origins. So India, Thailand, south Southeast Asia, all the way into Australia, typically they have a higher likelihood of seeing a drier pattern as you move across. For the United States, again, more heat manifests itself, but there also is more moisture that becomes available. So typically they tend to be better years on the precipitation side in North America, into probably the northern part of Mexico as we get into South America. Brazil, obviously, again, from a commodities perspective, is the first country that we just focus on. They tend to see more the way the jet stream diverts and it brings additional precipitation into kind of most of central to northeast Brazil. Areas that may have experienced a dry regime over the last few years will probably see more precipitation. But the flip side of that is they do see a higher likelihood of heat stress. So again, there's no, there's no perfect analog, but those are kind of some of the general things that we start to see. And then the last one is that we get into kind of the central back, like sub Saharan Africa. A lot of the aspects of, as the trade runs move basically east to west out of Africa, a lot of the dust from Sahara that typically suppresses precipitation tends to migrate out over the Atlantic Ocean. And what that does, it allows more precipitation to reach some of the agricultural belts in sub Saharan Africa that they maybe were not experiencing in recent years. So there's. You can't look across a board and say, okay, this is a positive or negative, because it really is a mixed bag. But. And again, as we get into more granular discussions, when you get into individual countries, into growing regions, it paints a different picture the deeper you go. But those are kind of some of the broader scale effects that we can anticipate to see.
- [09:47]
A
Yeah, it's an ill wind that brings nobody any good. That is a very old phrase. But so we are going to work our way through different commodity markets and then more broadly the impacts of this, because again, I remember reading years ago now a book where someone had mapped the El Nino events as best they could tell from, from climate data and weather data, from ice cores and all the rest of it over dynastic changes in ancient Egypt. So it definitely, it definitely has an impact. And the other thing to say here is. So we don't know the. We can talk about intensity and duration, but I guess one of the things that's going to make all of this much harder is that we've just come off the back of an El Nino year. So people in Brazil will be very familiar with this impact and are and remember it. Secondly, and more crucially, we're already in a world of stress supply chains, particularly with Hormuz. We've had significant amount of fertilizer, has not reached intended markets, will not reach intended markets. You've got a whole supply chain is disrupted there. So even so, even a small impact of El Nino in some regions that are already stressed from an agricultural standpoint is going to have a huge impact. And so that'll be played out. And this is, we're coming at this from a markets and commodities angle. But what your research and work has flagged that actually putting together the data, this could be not just a strong El Nino, but a super El Nino. And there are fewer analogues of that. One was 1877 when famines across the world. I don't want to get alarmists about this, we're in a different age today. But there's a, a huge sort of scale up impact. If we start hitting a super El Nino not just during the event, but also subsequent to the event and the resetting of global temperatures. Can you just give us some sense of why this is looking like if not a big El Nino than a super El Nino?
- [12:03]
B
Let's start off with some of the analog here. So yeah, again, as long as we can reconstruct data, I mean there's ways to kind of take this back and see over thousands of years what this cycle looked like. And that is reflected in both ice core and pollen data kind of shows this pattern that has repeated itself throughout history. But if you put it in modern times, there's probably three analogs that come to mind. So the 82, 83 event was 1, 97, 98 was 1 and 2015, 2016 was the third. And for me, two of those three, I was actually trading commodities through them. So I remember them pretty well. 82, 83 is before I started. But, but if we kind of put in the modern era that those are the three analogs that kind of jump out for a couple different reasons. So one and a couple things I should have mentioned when I started off on the El Nino. I mean there's a variety of indicators. One of the things that we always look at in the climate community is called the Southern Oscillation Index. So it's basically just a pressure, it's a pressure differential between a location in Darwin and Tahiti and when that, when, when, when that measure that, that delta is negative for three months in a row, just from a scientific perspective, you're technically in and on a NEO event. And then of course, the stronger negative is, it tends to be a stronger event. So that's one. And then the second piece is when we look at the Pacific Ocean, we break it into what are called Nino boxes. So there's a box between four, there's 1, 2, 3 and 4, and then 3 and 4 separately. The combination of the Nino 3 and 4 box around the equator, you basically just kind of look at this as a large aerial grid. If that is in the, the csap temperatures are elevated above a degree and a half centigrade. That's kind of the second measure that kind of confirms that we're in El Nino territory. So both of those have happened. That when we look at analog years, the thing that is similar to this with the years that I mentioned is we've had a rapid acceleration. So one of the things that we always tend to look at, and again, this is where if you kind of do like the high level analysis, they always just talk about sea surface temperature, but all of this really materializes beneath the surface. So if we just kind of take a step back and we look at the subsurface profile right now roughly around, I kind of start to the dateline in the Pacific. But if you start to move east, somewhere between 160West and 120West, there's a very large mass of warm water. And in a typical El Nino, the subsurface anomalies between 100 and 200 meters at depth, they're roughly 2 and a half to 3 degrees Celsius. And that's typically if you kind of have this warm water mass that's wide from an aerial perspective, and also it's migrating eastward. Once that surfaces at Indo specific, that just contributes to the warm water that with the surface water that's moving across the ocean. And then you kind of have these larger scale El Nino ripple effects. But just going back to on that piece, so typical Neo, that subsurface mass is around 3 degrees above normal. And right now anywhere from 160 to 120 west, it's actually around 7 degrees centigrade warm. So I mean, that alone is just a number that jumps off the charts. Right? So yeah, and you heard that right? So it wasn't seven. Oh, you've gone from three to four. No, this is actually seven. And at the central portion of that more mass, it may even be a little bit Higher. So when I see that from a scientific perspective, forget all the other analogs we're looking at, to me that's cause for concern. And that's why I think we went from this time last year. You can kind of see some of the signals pointing towards El Nino development. But one of the things that really got the climate community concerned is when you start to see just the aerial extent and the magnitude of that warm water anomaly, so what that will come to the surface and it's already starting to surface, and as it kind of rises to the surface and it combines with again that warm water surface where it's moving across, then you have really significant effects. So I don't like the term super El Nino because it just, you know, sounds like they're almost sensationalizing things. But if there is a characterization of what a super El Nino is, this looks like it's shaping up to be one. But in any event, this is really what's kind of the fuel behind making this a very, very strong.
- [16:23]
A
Well, let's. Can you just share those sort of recent analogs? Kind of what. I don't know. That's a fair thing to do.
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B
The three years, I mean. Yeah, it was 82, 83, 97, 98 and 15, 16. Those are the three that I'm.
- [16:34]
A
Yeah, when you get that stronger. Because I mean, I assume every sort of research department in a commodities house across the world has obviously got their eye on this one. Right. When you get those stronger El Ninos, whether it's super or not, is that. Are we talking as a function of intensity? So how much all of the predicted effects can. You're seeing an order of magnitude greater. But does it have any impact on duration as well? And are there any other associated. You sort of talked about El Nino as a bit of a gateway for changing other climate systems. We've got the AMOC and all the rest of it. What else happens when you get that level of intense strength?
- [17:11]
B
Yeah, it's at least the data that I look at and I focus on for the combined markets in particular, it's definitely more of a strength and intensity issue than a duration issue. There have been really strong El Ninos in the past, maybe not quote, unquote, super El Ninos, but there have been very strong events that within a month or two the energy dissipates and it's already trending back towards neutral.
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A
So
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B
some of the literature suggests that over time, El Ninos have actually. It used to be kind of like a 7 to 10 year event that, that Compression time has actually gotten a little smaller. So what used to be seven, 10 years might be four to seven years now. So you're shrinking the time between events. And then in doing that there is some evidence that suggests that they are getting stronger as well. But as much as evidence that there is suggestion of getting stronger, there also are analogs where you've seen these strong events kind of just peter out without as much warning. So I won't focus as much on the duration, but the intensity and the strength piece is certainly something that as we're thinking about commodity markets, we're approaching the end of the year in 2026. These are going to have spillover effects into 27. And from a stocks perspective, a stocks to use perspective, probably into early 28. There are definite markers that we should be keeping an eye on.
- [18:31]
A
Yeah, and let's do that. And one bit that you and I were discussing before we hit record was sort of these, also these El Nino events seem to reset the planet's temperature higher. It's not like we haven't seen recently. It's cool back down to pre event. They seem to add additional warming to the earth which is accelerating climate change. But that is another topic in some sense. Okay, let's.
- [18:56]
B
But it is, let's just touch on that a little bit because it's important because we're in this world and I mean we've always been in this world, but this is really a classic example of shifting baselines.
- [19:07]
A
And yeah, we're in 1.5 now.
- [19:09]
B
Right, right, we're in 1.5. And when you use a model, I mean a lot of times these models, they're tuned to quote, unquote normal, like whatever normal is. I mean a lot of the literature suggests that a 30 year period is normal. I actually advocate using a very more recent period. If we're. If you look at a 30 year period, you kind of smooth out some of the peaks and valleys. And if you're trying to build a response model against what is considered normal, you're missing some of the information. If you're really looking at where we are now, if you break that 30 year period into three decades, you have these three 10 year periods. The most recent is probably the most relevant for what we'd expect the response to be like. And you kind of mute some of the effects if you're averaging out over 30 years. And I honestly don't really think a 30 year period means that much anyway. But the point of all this is the danger is if you're building Models and you're associating, okay, what are we going to expect things like production and yield and disease potential and other variables going to look like. And you're tuning against a normal. You're probably going to miss a lot of information. So that's something that I think particularly as we're in this event, it's better to look at other years, even if you're outside that normal period, but look at other years that have very similar physical characteristics and then construct your analogs and potential responses that way.
- [20:28]
A
Yeah, and an entirely other different podcast is investing in resiliency. But we'll, we'll leave that there and people will reach out to you directly with a lot of your work on that. Right. Okay, let's. We, we're in danger of bearing the lead. Okay. So very, very strong El Nino, possibly quote unquote, super El Nino. It's going to be start really hitting our news channels in depth pretty soon. It's sort of still at the moment kind of somewhat in sort of the investor community and slightly esoteric, but it's here, it's happening. And you could just, you say you can just look at the temperature anomalies and it's going to have an impact just taking those major ag markets. Let's start I guess with what's going to go, what is this going to happen? What will the impact be on the ags and soft markets? Do you, I don't know. You want to take that geographically or by a particular commodity?
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B
I think by commodity because they are so interconnected now. And just the way the dynamics between how a lot of these markets interact with each other is a lot different now than it was in the past. So I think there's, if we kind of look at groups of commodities, the first one that always comes to mind when I think about event like this, it's really what's happening with sugar, corn and ethanol. And we'll talk in a minute about how they're all related. But we think about commodities. A lot of people, they go right to the grains. They go corn and soybeans and wheat and things that are probably getting more news time. But when we think about what really matters from a macro economic perspective, sugar is actually extremely important. And so when we look at this kind of El Nino event, the two largest origins to focus on right away are going to be Brazil and India. And as I mentioned earlier, the monsoon actually got off to a slow start. They picked up recently. But I have a little more risk on the India side. And I think if you look at where the primary sugarcane belts are in India, it's unlikely that the favorable suggestion pattern is going to maintain itself throughout the duration of the monsoon. So I'm already looking at reduced output in India, Brazil is they have two different belts. So their core belt in the center south states is Apollo. In the surrounding states, they probably will have a year where they're going to see reduced impacts on the negative side, but you're going to offset that a little bit where there is a cane bell in northeastern Brazil. And that more, more like more than not that you'll. You'll see a dry pattern materializing here. So just from a physical stocks perspective, we see upside pressure for prices, meaning downside product on production. Brazil for sugarcane. Now what that does, it also spills over into what's happening with corn. So we already have kind of a tight supply, demand balance sugar. And now when we add corn in with the uncertainty. And again, this is where one of the things that make commodities so fascinating is even if you're focusing on one commodity, you really have to kind of look at it in the mosaic of everything else that's happening. So sugar is going to be, to me, the one to really watch for a lot of other reasons. So what that's going to do is with the uncertainty on oil prices, when that happens, we kind of see ethanol. There is ethanol from corn and ethanol from sugar. And when there's more stress on the crude oil side, it makes the economics around diverting sugar cane for sugar consumption away from the consumption piece and more towards deriving ethanol from both sugar and corn. So if there is supply issues and there's potential curve on the production side for sugar, where the economics are becoming more favorable for diverting sugar for ethanol, there is a potential ethanol issue that we should probably keep in mind and it's worth monitoring pretty closely for the next few months. And then ultimately, again, I mean, I don't think anybody that says they know what's going to happen with oil prices, I probably wouldn't trust them. But there is a lot of uncertainty. I mean, day to day, week to week, and whether the straightforward was open and closed, plus a number of other factors on top of the fact that we still have, as we all know, the production and consumption statistics around oil is there isn't a whole lot of buffer. And so when you kind of put all these things in the mix together, what starts off as a sugar story also is going to spill over into corn and ethanol and oil. And if I had to rank things, that's probably the one that I'm focusing on more than anything else now. There's, there's obviously a lot of other commodities that we're going to keep an eye on. Again when I'm getting to the grains and oilseeds area, probably more favorable for North America when it comes to things like soybeans and soybean meal and soybean oil just based on the kind of pattern that we'd expect materialize. But again it's a global market and positive in North America. I'm still looking. If I look at Argentina and kind of southern Brazil, the soybean belts, it's kind of be mixed there. I mean they will have a little bit more precipitation. But again heat stress is going to manifest as if masses of this year in ways that it probably hasn't in the last few years. And then of course on top of that, when we throw wheat into the picture, Australia just has a dry signal across almost the entire continent. So these areas where it looked like we've had healthy supply buffers over the last couple of years, I would expect that to start eroding a little bit. And then above on top of everything else, when you have these geopolitical wildcards again related to straight home moves or other, it really just kind of paints the picture for at least a higher potential for volatility.
- [25:56]
A
Just so I understand. Okay. So Brazil is. There might be more precipitation. Well on the, I guess on the eastern Pacific side. But you get, you can get the drought inland, you get higher heat and all the rest of it. Are we. Brazil obviously is, I don't know, planting about pretty soon. Right. Will this be a. So this would be their harvest this, this winter impacted or is it going to be. And I mean again just I want to pin down that duration piece. This would be their harvest this winter, potentially even next year as well. Or would it just really be this winter and it would be the, the northern hemisphere planting in spring impacted as well.
- [26:40]
B
North hemisphere, I mean I think planning. You might see some delayed planning just because of in the southern portions like we kind of break the, the grain belt into kind of a northern southern half across east and west it's going to be. It would look pretty similar but northern probably would have more favorable conditions. We might see some planning delays in the south, the southern states. You kind of look at the 18 major states where grains and royal seeds are bloom. But net net these are still generally more favorable conditions than not. So I'm less concerned with North America. I think numbers will probably look pretty good on the production side. But in Brazil, again, where I think it's. I'm more concerned is not necessarily. I think the current crop that's being planted now, this is a longer rotation crop. But when we get into that second crop that has that shorter planting and planting to harvest window, moving from 120 days down to maybe 80 to 90 days, that's where I think some of the heat stress issues may start to manifest themselves as we kind of move north of Sapollo. And then again as we get into Cordova, I think the precipitation pattern will probably help. So we should see on the supply side conditions that are conducive towards for current crop to be favorable. But as we move away from this event and get into kind of the 27 fiscal year, which will be the 27, 28 marketing year, that's where I'd anticipate to at least. Again, it's not even really structure our trade around that, but it's just a variable that is worth monitoring now and monitoring each month because each month we have new data. We can kind of extend that lookout a little further and kind of look at the front months with a little bit more certainty. I do see some potential supply issues that are going to hit South America kind of in that maybe mid 27s,
- [28:18]
A
especially with energy costs and fertilizer costs, such as they are. Right. I mean, that whole picture needs to be joined in. Do you.
- [28:26]
B
This comes back another really key point. Right. Because it's not. It's the crop itself is one thing.
- [28:31]
A
But I mean, that might impact the US Right. Even if you might not have the same offsetting capability. What the. The other thing is when we look at that 1877 El Nino event, and again, there were other factors going on, but like that's when the monsoon actually failed in India. I mean, there are sort of these huge tail risks as well. You could have catastrophic crop failures if we have such a significant event. Yeah.
- [28:57]
B
And the line between failure and quote, unquote, normal monsoon, it's only like a 10 to 12% deviation from normal. So we're not talking about 50 or 40% of normal precipitation. You only need a little less. I mean, relatively speaking, but you get to about 10 to 15% less than normal and that will have major impacts. And again, if this material, if this one materializes the way it could, we could even see larger rainfall deficits. That. So it's.
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A
Yeah.
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B
And then we see this is a real concern.
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A
Yeah. And then also the soft. Just thinking back through some of the episodes we've done. You've got coffee, you've got some of the sort of tree based softs that are already in a really having a tough time of it as a result of climate impacts. I assume that this is just injecting uber volatility. Well, price increases into those categories as well because again if actually those regions, some of them are going to be hot, they might be offset by others, but again it's going to be challenging to navigate.
- [29:57]
B
Yeah, I mean if we just kind of look at both of those. It's funny because I watch coffee and cocoa pretty closely. I expected to see a little bit more volatility in those right now just based on the uncertainty. But it's certainly variable to watch. And if we look at cocoa again from an origin perspective, you have two countries that produce 2/3 of all cocoa. In West Africa we're already at a relatively again from, I'm always going back to the supply side. If you have healthy stocks and from stocks, meaning supplies, you can withstand some of these disruptions. But we already are kind of tight stocks. West Africa looks like it should be okay, but not, it's not. You look at a lot of the crops that are, and this goes for coffee and cocoa, you kind of have these alternate bearing years and when you have a year where they produce really well, they tend to be a little, they conserve more energy the following year and they, there is a little bit of an offtake. So we're actually on the up, the upward part of that trend for both cocking and cocoa in a lot of major origins, particularly in West Africa. So I'm less concerned with impacts there. But again India and Indonesia, where a lot of beans are sourced from when these dry patterns materialize, even if they're on the upside of that curve on the alternate every year cycle, if there's no water, it doesn't matter. Right. And that's what a lot of people, you know.
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A
Yeah.
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B
We try to engineer all these, these traits into these varieties that can withstand less water, but when there's almost no water, it does not matter.
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A
Yeah. And talking of water on this sort of rapid tour de horizon of kind of the, of, of the impacts and obviously I'm, I think this is probably more of a, a brief sort of raising awareness that actually yes, there's an El Nino, we're in one, but it could be a really intense one. And there's all these other exogenous factors going on. There's also the complexity of climate systems that can, I mean I, I went down a rabbit hole yesterday Watching how this might accelerate the melting of the the the North Pole, accelerate the shutdown of the amoc which would plunge basically where I grew up in Nottingham into in sort of an ice age which anyway, that aside but talking of water, what is this will also have big impacts on energy. Let's start with hydroelectric big source of water of energy in South America, northern Europe. What happens there in sort of analog events.
- [32:26]
B
Again, this is one of those instances where particularly for areas that are hydro dependent and they need to see reservoirs recharge for again North America and a lot of South America, it'd probably be on the favorable side. So areas where we've seen lower levels both in groundwater as well as in storage levels for behind dams for hydro power. Brazil and the kind of the Northwest in California, like a lot of the rain that kind of builds up the
- [32:56]
A
Colorado river kind of thing.
- [32:57]
B
Absolutely. This is really going to help. Again we said go on helping polls because again I was saying things happen, you just don't know. But it's more likely than not to see a favorable water balance materialize and help those origins. But again moving across the Pacific I'm less concerned about Europe's hydro situation. But again hydro into Southeast Asia. These dry signals are so pronounced and they're defined in a way that we probably haven't seen in recent years that any areas that are both dependent on rainfed agriculture as well as building up reservoir levels for hydropower, I really see elevated risk in those portions of the world as well as in southern Africa. It just you kind of have this, this belt where Southeastern Africa, as you kind of get across the Horn of Africa there will be some favorable precipitation pockets there. But if you kind of stratify Africa, as massive as it is into kind of three regimes, that's that southern portion that that southern third really runs the risk for precipitation deficits and that'll absolutely spill over into hydro power.
- [34:06]
A
Yeah, the. We're going to come on to logistics and transportation shortly because and I know it's a little bit more murky El Nino impacts on Europe, but there are sort of some and, and again that intensity matters. But we're going to talk about the Danube and the Rhine and then what happens to the Panama Canal in this just talking energy markets. Staying on that for a moment. We've talked about oils on its own path of various reasons. But if we think about energy consumption in India, in Southeast Asia in a much hotter, less wet 12 months or whatever it might be, how does that play out? Are we going to. When you throw in Hormuz as well, which is restricting feedstock supplies and fuel, fuel supplies to the region. It could be quite a torrid period. High energy consumption, high prices for those regions, if you're a natural gas exporter, et cetera.
- [35:04]
B
Absolutely. I mean, ACs are going to be cranking. There's no way around that. And this goes for North America too. I mean, even with favorability in some areas, the fact that ACs are going to be cranking, demand is going to be high. If air condition is available, the air condition won't be shut off for long periods of time. It's just we have that kind of pattern setting up. And again in other years past where I think energy sensitivity due to the AI build on everything else and the geopolitical activities, it's. The sensitivity is a bit heightened where maybe in past years it wasn't as much. And even something like. When I look at yesterday's natural gas number, the storage number shows a small build and a lot of times as we're kind of entering this portion of the season, it can go either way. So I think there's almost like this false level of complacency that from at least from a natural gas exporting perspective, stockpiles are high. There's enough underground storage right now compared to this time of the year in prior years. But when you have these really long periods of high demand, that can flip pretty quickly. And it's not just happening in North America, it's happening everywhere. So the pull for NAT gas is going to be stronger. And again with these other wild cards, it just, to me, it just. I'm not going to say what prices are going to do, but it just injects a lot more uncertainty in the equation in a year like this than we'll have in your spouse.
- [36:21]
A
Yeah, just. I want, I kind of. I know if I was a more effective interviewer I'd have done this earlier, but I'm still sort of slightly hazy on duration. And, and your word complacency sort of triggered me in that the last big event or strong event was that 23, 24, which was only. Was. Was quite short in duration, sort of a six month.
- [36:41]
B
That was six, seven months, I believe. Yeah, yeah.
- [36:44]
A
So, but that's by no means an indicator that this wouldn't. Could also just be six months, in which case things start to get back to normal in this time next year and we have a normal summer and normal patterns resume kind of in spring next year. What you mentioned earlier on. So if we were in this for A couple of years and we could be that. That to me would seem like we would have a really tough 20, 27, 28 period. Right.
- [37:16]
B
I mean if you look at the, and these are, there's kind of this ensemble of state of the art models and a lot of them tend to be generally in agreement as to what they project going forward. So if you look at most of the models now and a lot of the International Research Institute in the Climate Prediction center are just a couple that I look at quite a bit, but that's a lot of them are missing. IRIS and then Climate Prediction center is the US noaa, it's the federal government in the United States. And when you land in the ensembles, the Japanese Meteorological Agency has another one that's very good that I kind of focus on. But they all kind of have this current event peaking in the call. They break it into three month groups. So the October, November, December of this year, that's where they're kind of calling for it to peak. Now, two things that are worth noting here. Just because it peaks, that doesn't mean as soon as you move out of that, you're out of the period. This, the, the, again, the, the thing that always keep going back to the fact that we have such a massive subsurface mass of water at that depth that I was referring to earlier, energy like that doesn't. I'm kind of going back on what I said earlier. Sometimes these events can turn up pretty quickly. There is so much energy that would actually need to get transferred from one phase to another with this type of event that I don't see a short event materializing here. So even if the, the quote unquote peak is that October through December period, this will have effects that not just materialize, but materialize and linger for probably the following. You can count 8, 10, 12 months and quite possibly even into 2028. But I think if we're looking at the calendar year of 2027, we can expect Elinia like impact to be very prominent for the major a good part of the year and certainly spill over into the following year.
- [39:03]
A
Yeah, and how worried let's say we're having this conversation in January and they're still not yet predicted a peak or that peak is sort of maintained in those three month blocks. I mean, if we're, if we are in Q1 and it shows no signs of slowing or lowering in intensity, that's presumably kind of a big signal that all of these impacts we're talking about not only be here to stay, but also Might get orders of magnitude worse.
- [39:33]
B
Yeah, because there's, I mean, one of the things that we do then what we'll do the data and one of the reasons that we kind of foresee this event coming is we use what are called teleconnections. Right. So there's a lot of, they're, they're recording going from the deep ocean all the way to hundreds of miles in the atmosphere. And there, there are certain patterns that you kind of know. There's a memory, we kind of call it this climate memory. So if we have certain parameters line up in place, pressure related, not necessarily precipitation, but things around, again, the steering torrents, what's happening in terms of how the atmosphere, the dynamics of the atmosphere and how they're moving and what sustained readings are at certain periods of time at certain parts around the world. It's kind of like a puzzle. Right. So there's certain things that might be happening in the western Pacific and they might have a series of lighting effects that we can kind of say with some certainty that's going to translate a certain type of pattern to happen in Eastern Europe several months later. Right. Just because of, just the way the pieces of this puzzle and mechanics behind them work together. And if this is, if we're still seeing these as say we're into January 2027 and we still see these variables that are showing strong El Nino maintenance, then there's a very strong likelihood that we're going to be in the El Nino phase of the El Nino for at least several more months. And then he doesn't kind of move towards that peak and receding event for maybe six, seven months later. Again, during that portion, you're on the downward portion of the El Nino curve, you're still going to have effects that are going to spill over into the next 3, 6, 9, 12 months. So those are the kind of things, if we start to see these quick turnarounds, so say it does peak and then we see a rapid drop off in some of the fiscal energy drivers in January, February, then we could say maybe we would compress it and expect things to return to, quote, unquote normal a little shorter. But that really is just month by month. But there are ways going back to the teleconnection piece, the pointers that we're looking at, there's variables that we're looking at now in terms of pressure levels in the atmosphere and the way certain wind patterns are behaving. It's unlikely that it's just going to peak and then reverse pretty quickly. So I would expect this, even in this peak phase, to be a little bit longer than normal.
- [41:47]
A
Yeah. Okay, let's move on to logistics and transport because we bring up all this
- [41:52]
B
good news to everybody.
- [41:54]
A
Well, as we record right now, the Rhine's back at record lows, so is the Danube. You've got the Barber El Mandeb straight if not closed, and certainly threatened. And Hormo's definitely closed. The one thing holding it all together at the moment is the Panama Canal and obviously the Suez as well. But the Panama Canal, in the last big El Nino event, 23, 24 saw those record lows that nearly stopped traffic and in some cases did. Or far fewer transport slots and very much higher prices. Yeah. Are we in a fat tale of actually having the world's commodities and logistics grind to a halt because every single major canal has been shut down?
- [42:41]
B
I think that's a good way to look at it, Paul. I think the world can get by if you talk about. And there's obviously a lot of ports in a lot of origins, but let's just use the five dimension. I mean, the world will still function if two of them are closed. But if you have a scenario like we're having now where there is a higher likelihood than normal that we could see significant disruptions to barge traffic in four or maybe even all five of them, that usually doesn't happen. And when it does, usually the outcomes are not very pretty. So I think this is a year where that type of scenario, again, you always have to kind of put this in the context of scenarios of what could happen. Even if they're low probability, high impact, that means they still can happen. And I think we are setting ourselves up just based on where levels are now and looking at replenishment rates that is not off the table. And it's something that would probably encourage anybody that's really closely watching these to really focus on this year because it's. It's usually not the case where you have that kind of risk hitting all of these on time.
- [43:46]
A
Yeah, I mean, it's a bit counterintuitive. You sort of. Some parts of that east coast gets warmer, but it's more precipit. The precipitation stays there. The Panama Canal is not on that beat. Right. And sits sort of right at that heart on the equator where all the high temperatures are and you get a significant drying out and it's just not filling the lakes above the canal. It's. And we'll have a. We come back to it. Right. That's an oil story. That's An AG story. That's definitely an LNG story as well as a general trade one.
- [44:16]
B
Yeah.
- [44:17]
A
What does this mean?
- [44:18]
B
Much. Right. And that's why we're always going back to the geography piece. And this goes back to some of the things that we were going back in the Alpha Geo podcast, Geographic arbitrage. There are real reasons to understand where things move. Right. It's not just where they're extracted from, but how they're moving and how they get from point A to point B to point C. And from a. From both a latitude and a longitude perspective. Sometimes those barriers between favorable and unfavorable, they're, they're, they're, they're pretty thin areas. If you look at Panama, that happens to be one of those areas, you can move a couple hundred kilometers north, south and you're in a completely different regime in terms of what to expect from a favorability or an unfavorable perspective. And unfortunately, just where common LA is located, even with an area where there might be in general a more favorable conservation balance, it doesn't look like it's going to help there right now.
- [45:04]
A
Yeah, I mean it's, yeah. That level of granularity is, is needed and in a, in a world that's very much.
- [45:11]
B
It's actually fascinating.
- [45:12]
A
Yeah. It was also kind of in a world that's used to. Kind of part of the challenge is everyone's sort of catastrophizing everything. Right. And they, okay, if Hormuz shuts down, everything goes to hell in a handbask. It hasn't. You know, actually these markets are very resilient, but they're really resilient until they're not. And major, major climate impacts especially, I think the intensity is key. But duration to me seems like you can get through one, win one harvest, but you can't get through two. And, and there's all these other factors coming in, particularly with obviously the fertilizer story that's really yet to play out. I think. Although it.
- [45:50]
B
Yeah, we had a little activity right. When the first, when the straight first shut down and you saw urea prices spike and then they kind of returned to normal. And I don't think the risk there is really fully right now.
- [46:00]
A
I don't think the price is reflect. Well, I don't. We've got a fertilizer episode coming up that's, that's booked. It just needs to be recorded and we can dig more. More deeply into that. And we've certainly done. Done ones on, on sulfur recently. Where, where is. I mean I, I find this fascinating and hopefully it sets a few people off down some rabbit holes looking at all this. And, and, but what from a macro portfolio standpoint is this. I mean if there weren't enough reasons to sell your stock portfolio right now, this would seem to, to add another one. It does seem like it could be particularly negative, you know, for your, for the, the markets as a whole, if not create that volatility in the commodities sector that our friends at the trading houses are used to handling. But what happened in analog events to the markets in general and so forth?
- [46:57]
B
Of course the answer I think it always depends. Right. But the way I kind of like to I look at break into three buckets. So just from a macro perspective, I think one of the things that's really could get ugly again worth monitoring is currency strength at major origins. Right. So the whole idea, there's always kind of been this law that commodity prices are in one area and the dollar strength is another area and that, that it tells a nice narrative. But when you kind of look at these disruptive events that that playbook gets thrown out the window. So when you look at the strength between not just the dollar itself, dollar Brazil and then dollar Indian Rupee and then dollar Yen, a lot of these, these currency strength relationships that are commodity dependent really start to rise to the same. So just from a macro perspective, I think the thing that I'm really looking at is is is fx, the commodities themselves again I think there is a little bit of buffer built in on some of these. I think like we're talking about N gas. You can withstand some disruption and I think that'll get buffered a little bit in the price. But if you exceed and you kind of move towards these tail events, we can move from a very comfortable nat gas picture to something that is extremely volatile in a short period of time. So there's again in that world there's winners and losers, but then the third one is really just on stock portfolios themselves. There's, there's more and more evidence now that's showing it's not necessarily around climate change, but just climate volatility. Like any climate regime doesn't really matter what the driver is, but there is financial impact, positive and negative based on the kind of climate activity or climate regime that we're in. And we're talking about gas. I mean air conditions are going to be on, there's increased demand. So if you're a producer, your refining margins, your operating margins are going to be fatter. I would think those would be Places that even in this kind of scenario are going to benefit. The flip side is we've been talking a lot about food and agriculture. I mean food companies, fertilizer companies, crop protection companies, I mean they're, they're operating a really thin margin business to begin with. And then when you have either impact on the crops themselves, if you have impacts on raw materials, if you have your attractor company and you're typically seeing kind of this renewal cycle that might happen every five to seven years and if growers aren't making the operating margins that they're used to, maybe they're going to hold off and not buy a tractor for another one, two years. Right. So it's the entire end to end ag value chain, which is a thin margin business to begin with, really runs the risk for I think some, some even more negative performance than we've seen. So certainly winners and losers, but if I had to kind of bucket them, I would say more winners on the energy side and certainly losers and kind of like the broader ag in food and bever side.
- [49:35]
A
Yeah, yeah. And it's not the year to be having a El Nino really, is it? When you wrap in all this other, other pieces, there's a lot to sort of figure out and certainly I guess it's kind of keeping as you say, it's actually starting to get familiar with Noah's website and so forth and, and, and track this, the both the intensity and whether, whether that target peak shifts. Because I think this could be the, certainly the consequential story of 2027 from a, from a weather standpoint. As always, Michael, it's fascinating having you on and I know, but I guess our listeners don't that you sort of have this fascinating career at various commodity houses and public companies kind of at the center of data insight and kind of building the platform that underpins that. And obviously AI has, has supercharged that. You've just done that at mobi. I don't know if you want to give us a couple seconds on Moby and what you've done there.
- [50:34]
B
Sure. I mean MOBI has basically have an investment platform that's geared towards the retail investor. And the idea behind the company is to bring what would be in the past considered institutional type research that was usually kind of walled off in banks and hedge funds kind of break down those walls and putting the same kind of research and analysis in a format that's open for retail investors. So and on top of what we're doing on just the general market and stock picking side, we Do a lot of thematic research and I'll just default to my background. A lot of the things I talk about, I'm really trying to work commodities into the story. A lot of people, if you're not in the commodities world, you assume commodities are really just for the commodity traders. But as we, you and I know, and most of the people are in commodities. Commodities touch everything. And it really doesn't matter what your portfolio is. There's a way to kind of work the climate and commodity story into any, almost anything that you might be investing in. So we're really trying to kind of educate users towards how do we look at the world, not just through what's happening on the balance sheet side, but what's happening on climate and commodities and macroeconomics and how that impacts where I might want to invest, where I want to deploy capital. And. Yeah, so it's actually a really interesting platform and the user base is growing and. Yeah, we're just hoping to keep growing. It's been a lot of fun.
- [51:47]
A
Yeah. And people should reach out and connect with you on LinkedIn and read your, your, your white papers and so forth. So. And obviously have a great commodities angle. Well, Michael, I mean, I, we could go on about this all day. Really, it's fascinating.
- [51:59]
B
I tell people I can, I could talk about this stuff for eight hours without taking a breath. So trying to condense it into an hour is always a challenge, but, yeah, I think we hit the high points.
- [52:07]
A
Yeah. And people want to scare themselves. Go and have a look at the 1877 event.
- [52:11]
B
Yeah, actually, I jotted that one down. I'm gonna take a look at that one.
- [52:14]
A
Yeah. And then you throw in a couple of solar flares and. And the closing of the straight of Hormuz and the Panama Canal in 2027. We keep saying that was a tough year, but it's happening more and more frequently at the moment. And let's hope that our commodities markets stay free and open and allow those firms to solve problems in time, space and form, as I keep saying. But, Michael, never a dull day. Never a dull day. Joy to have you back on. I hope to have you back on in the future and we'll stay in touch.
- [52:44]
B
Great. Thanks, Paul. Appreciate it.
- [52:48]
A
Thank you for listening. To find out more about HC Group, our global offices, and our expertise in search within the commodities sector, please visit www.hcgroup.
- [53:04]
B
Com.