Extreme weather driving commodities

According to fund manager Schroders extreme weather conditions have driven commodity prices at the start of 2014, with the DJUBS Commodities index up 8.3% to March 6th.

Alastair Baker and Patrick Brenner, fund managers of the Schroders Multi-Assets Insights fund said that the very cold winter in the US pushed up the demand of natural gas for domestic heating. The second extreme weather event came in South America, with hot, dry weather in the key coffee growing region, and heavy rain in soybean growing areas. As a result, a key commodities agriculture index has risen 16% in 2014, with coffee up 74% year to date. Baker and Brenner said that sharp movements in agricultural prices due to weather disruptions are an indicator of the El Nino weather pattern, which is now predicted for the northern hemisphere summer of 2014. They commented: “We believe there is a significant upside for grain prices should the El Ninon develop. Considering the potentially severe weather shock, we have moved from a negative to a neutral view on agriculture.”

Looking at currency prices and trends, Brenner and Baker expressed concern about emerging market currencies which are affected by capital outflows caused by the tapering of quantitative easing in the US. In addition, they said currencies such as the Brazilian real, the Chilean peso and the Russian rouble are sensitive to commodity price moves. In addition there are a number of elections scheduled for emerging market countries in 2014, making it sensible for investors to avoid major exposure to emerging market currency movements for the time being.