Skip to content

How changing weather is affecting commodity futures volatility

How changing weather is affecting commodity futures volatility

Weather has always been a key factor affecting commodity prices, even though this may not be readily apparent to investors. Agricultural yields depend on rainfall, frost can ruin crops, and hurricanes can disrupt supply chains. Recent years have seen a significant escalation in the weather’s impact on commodity markets, leading to unprecedented volatility.

From droughts and wildfires to tropical storms, these extreme weather events have transformed what were one anomalies into regular disruptions. Such shifts have forced traders to reconsider traditional approaches to pricing and risk management.

European broker Mind-Money looked at three key commodity markets recently that it considers to be particularly exposed to extreme weather events and indeed climate change, as demonstrated by their performance in 2023-24.

Orange juice futures and Brazil’s perfect storm

In 2023 orange juice emerged as the unexpected centrepiece of commodity futures market volatility. Brazil, which is the world’s largest producer of oranges, faced a combination of a ruthless drought and the spread of citrus greening disease, known locally as huanglongbing. These twin crises severely impacted Brazil’s orange yields – entire orchards suffered from wilted fruits and reduced productivity.

Get our Commodities bulletin for more stories like this:

The impact on orange juice futures was immediate and dramatic. As the supply chain tightened, orange juice futures soared, doubling in price over a year and a half. The prolonged drought, predicted by meteorologists as part of the La Nina cycle, had already set the stage for reduced water availability.

Adding to the woes, citrus greening further exacerbated the damage.  Supply shortages arose and traders struggled to adjust, as many market participants were caught off guard by the magnitude of the price spikes.

Meteorological data painted a clear picture for investors

In 2022, the Oceanic Nino Index was consistently indicating a La Nina phase in the world’s climate, with values between -1.0 and -0.5, signalling cooler than average sea surface temperatures in the central Pacific. This pattern continued to reduce rainfall across Brazil, exacerbating the drought and stressing irrigation systems for orange orchards.

Commodity Futures - Oceanic Nino Index

By early 2023, the ONI shifted into neutral territory, suggesting a weakening La Nina. However, as the year progressed, it surged into positive territory, marking the onset of a strong El Nino. With values climbing to between +1.0 and +2.0, El Nino brought warmer-than-average sea surface temperatures and further disrupted weather patterns. The resulting extreme heat compounded the drought’s effects, leaving already stressed orchards more vulnerable.

By late 2023, as El Nino peaked, orange yields had plummeted. Although ONI readings began to decline in 2024, signalling a potential easing of the El Nino phase, the damage was already done. The prolonged drought and persistent citrus greening left a lasting mark on Brazil’s orange crops and the global supply chain.

Orange juice futures reflected the crisis, surging to a record $3.69 per pound, an increase of 13% in just one month and nearly 78% over the year. Global orange juice production fell by 3%, totalling 1.5m tons, with Brazil’s output declining by a staggering 9%.

This perfect storm demonstrated the vulnerability of agricultural commodities to compounding weather and biological threats. For traders attuned to these risks, the signals were evident.  Yet for many, the rapid price escalation came as a shock.

Robusta coffee: drought and heatwaves in Vietnam

By mid-2023 coffee futures markets were jolted by a crisis centred in Vietnam, the top producer of robusta coffee. The central highlands region of Vietnam, known for their vast plantations, were hit by an unprecedented drought.  This reduced the availability of water critical for irrigation. Rainfall was scarce, rivers ran dry, and farmers faced crippling water shortages.

On top of all this, extreme heatwaves created ideal conditions for pests like mealybugs, which caused serious damage on already stressed coffee plants. Entire plantations were rendered barren, and yields plummeted, triggering a surge in robusta coffee prices on global markets.

The repercussions were felt worldwide, as robusta is a key ingredient in instant coffee and espresso blends. Price volatility soared, with coffee futures seeing dramatic swings as traders grappled with supply constraints.

Vietnam’s robusta coffee production dropped by 2.6m bags in 2023, falling to 27.2m bags due to the combined effects of drought and high temperatures. These adverse conditions triggered a price surge of 25-35% by mid-2023 compared with 2022.

The prolonged heat and lack of rainfall also impacted broader sectors like hydropower and agriculture. Reservoir levels in key regions plummeted; for example, the Ban Ve hydropower reservoir in Nghe An Province dropped to just 2 metres above the dead water level, forcing the station to operate at only 40% capacity. Notably, robusta coffee futures climbed from $1900 to $5200 per metric ton during the crisis.

As in the case of orange juice, predictive weather models had flagged potential risks. For traders who consider weather patterns, the robusta coffee market’s volatility presented opportunities to capitalise on rapid price shifts.


West Africa’s cocoa futures crisis

West Africa, responsible for nearly 70% of global cocoa production, faced severe heatwaves in 2024. The combination of scorching temperatures and the Harmattan, a dry wind sweeping from the Sahara that drained moisture from the air and soil, disrupted the balance required for cocoa cultivation. Ivory Coast and Ghana, the leading producers, experienced widespread pod spoilage, which reduced harvest quality and volume.

Between 2023 and 2024, cocoa prices surged dramatically, climbing by over 400% and making headlines worldwide as traders and producers vied for shares of the shrinking supply. Toward the latter part of the period, prices began to ease slightly due to improved weather forecasts, increased rainfall and efforts to stabilise production.

Profit-taking by market participants and softened global demand, driven by high price levels, also contributed to the correction. Nevertheless, cocoa prices remained historically elevated.

The market’s volatility was reflected in the trading activity. The CFTC commercial net position for robusta coffee futures fluctuated sharply.  Hedging and speculative activity increasing by 30-40% in response to tightening supplies. The CFTC Cocoa Futures & Options Long/Short Ratio spiked to 4 during 2023-24, reaching multi-year highs as traders adjusted to the volatile environment.

Conclusion

The volatility observed in soft commodity markets during 2023-24 shows the growing influence of weather on global supply chains and pricing dynamics. Events like Brazil’s citrus crisis, Vietnam’s coffee drought and West Africa’s cocoa heatwaves illustrate a broader trend – the intersection of extreme weather events and globalised markets demands greater attention from traders and analysts as weather is now one of the major forces that changes markets.

The ability to anticipate and respond to weather-driven shocks is now a critical determinant of success in commodity trading. For those with tools to interpret these patterns, numerous possibilities open up. For others, the risks of inaction are clear and growing.

Related ETFs

WisdomTreeCocoaCocoa
LON:COCO / USD
Buy Here
Buy at Hargreaves Lansdown Buy at IG Buy at Charles Stanley
WisdomTreeCoffeeCoffee
LON:COFF / USD
Buy Here
Buy at Hargreaves Lansdown Buy at IG
Read our Exchange Traded Fund beginner’s guide or see our range of featured ETFs

Share this article

Invest with these platforms

Hargreaves Lansdown

IG

Interactive Brokers

Interactive Investor

Charles Stanley

IG

Interactive Brokers

Charles Stanley

Looking for great investing ideas? Get our free newsletter.
Join our UK news channel on WhatsApp

This article does not constitute investment advice.  Do your own research or consult a professional advisor.

Learn with our free 'How to' Guides

Our latest in-depth company reports

On the podcast

Sign up for great investing stock tips

Thanks to our Site Partners

Our partners are established, regulated businesses and we are grateful for their support.

Aquis
CME Group
FP Markets
Pepperstone
Schroders

TMX
WisdomTree
ARK
FxPro
CMC Markets
Back To Top