A Look Back at the El Niño of 2015-16

One year ago, when temperatures were 1°C above normal in the Pacific Ocean, we warned that a powerful El Niño might be developing, and that past El Niños had exerted a strong influence on the prices of agricultural goods.  The El Niño that we warned about not only occurred but tied the one in 1997-98 as the most powerful on record.  The latest El Niño peaked in December 2015 at 2.3°C above normal, and has since begun to dissipate (Figure 1).

Our research on market reactions in the 12 months after each of the previous 11 El Niños began (Central and East Central Pacific Ocean temperatures reaching 1°C above normal on the National Oceanic and Atmospheric Administration’s (NOAA) Oceanic Niño Index) demonstrated the following:

  • Spot prices for agricultural goods traded at CME and CBOT tend to rise as El Niño begins.
  • In the past, futures markets largely failed to anticipate the impact of an El Niño and did not move more steeply into contango at the beginning of an El Niño episode.
  • As such, returns on reinvested futures were positive, on average, over the El Niño periods.
  • The soy complex and corn were the most impacted by an El Niño, whereas wheat, rice and livestock products were less impacted.
  • There was a wide variety of outcomes from one El Niño to another, ranging from extreme gains in prices (1972-73) to outright declines (1997-98), when viewed in U.S. dollar terms.
  • Stronger El Niños tended to produce greater volatility.

So how did the latest El Nino stack up against its predecessors?  For starters, average spot prices in June 2016 were higher than in June 2015 for a number of goods, including corn, soybeans, soymeal, rice and lean hogs.  Other prices fell, including those for soybean oil, wheat, cattle and dairy products (Figure 2).

Figure 1: The Latest El Niño Tied the 1997-98 Episode in Strength, and is Rapidly Fading.

Figure 2: 2015-2016 El Niño was a Mixed Bag for Spot Prices of Agricultural Goods.

Sensing that a powerful  El Niño was on the way, we warned that the 2015-16 El Niño might also resemble the one from 1997-98 in one other aspect: both came at a time of deep crisis in emerging markets.  The 1997-98 episode began in June 1997 when the Thai baht fell off its dollar peg, sparking the Asian financial crisis that eventually spread across the globe, culminating in the Russian debt default and the collapse of hedge fund, Long Term Capital Management, in August 1998.  Despite the 1997-98 El Niño being the strongest on record, it was the only El Nino during which spot prices for agricultural goods fell, in inflation adjusted terms (Figure 3).  Moreover, in 1997 and 1998 commodity prices generally collapsed, including the massive drop in oil prices. 

Figure 3: Inflation Adjusted Spot Price Changes in 12 Months After El Niño Begins.

Month El Niño Begins Corn Wheat Soybeans Soybean Oil Soybean Meal Rough Rice Live Cattle Feeder Cattle Lean Hogs Dairy
1: Aug '63 -3.2% -24.0% -3.6%              
2: Jul '65 6.6% 23.2% 19.3%       -5.7%      
3: Jan '69 -3.0% 1.7% -9.8%       -0.9%      
4: Jul '72 58.5% 61.5% 89.8%       25.3% 33.2%    
5: Sep '82 44.9% 11.0% 47.5% 65.4%     -4.8% -13.7%    
6: Nov '86 3.3% -1.6% 8.8% 11.7%     1.7% 16.2% -18.1%  
7: Nov '91 -17.2% -0.7% -3.3% 2.8% -3.0% -31.0% -2.6% 0.0% 1.5%  
8: Dec '94 41.0% 23.1% 22.0% -15.5% 34.0% 32.3% -6.2% -16.1% 27.7%  
9: Jun '97 -10.8% -22.0% -29.2% 9.1% -53.9% -11.0% -0.2% -5.8% -29.5% 11.7%
10: Oct '02 -13.9% -14.8% 27.1% 23.2% 25.1% 61.3% 28.0% 23.8% 28.1% 27.1%
11: Oct '09 37.5% 31.9% 17.7% 25.3% 8.5% -0.6% 13.8% 15.1% 27.1% 21.8%
12: Jun '15 11.3% -9.4% 16.1% -5.7% 21.5% 11.6% -26.7% -44.5% 7.3% -19.1%
Average 13.1% 8.1% 16.9% 17.4% 2.2% 10.2% 4.8% 6.6% 6.1% 20.2%

Source: Bloomberg Professional and Calculations from CME Group Economic Research

Clearly, the 1997-98 El Nino and the latest episode have a lot in common.  In June 2016, for example, West Texas Intermediate (WTI) crude oil prices averaged 19% below their June 2015 levels.  WTI fell by 27% between June 1997 and June 1998.  The collapse in crude oil prices probably contributed to downward pressure in the prices of soybean oil.

Figure 4: Corn Appeared to Anticipate El Niño Impacts via a Stronger Contango.

There are differences, too.  The Bloomberg Dollar Spot Index rose by less than 1% between June 2015 and June of this year.  From June 1997 to June 1998, the rise in the U.S. dollar was much more significant, especially against emerging market currencies.  As such, it’s harder to blame the lackluster rise in spot prices on a strong dollar (and hence weak foreign currencies) this time than it would have been in the late 1990s.

Another major difference between the most recent El Niño and previous episodes is that futures markets moved more steeply into contango as the latest El Niño developed, mitigating the gains to be had in holding outright long positions in futures.  This is apparent in corn, for example, whose spot price rose 11.3% but whose reinvested futures return (rolled 10 days prior to expiry) was only 2.6%, using average closing prices for June 2015 and June 2016.  Wheat futures appeared to anticipate El Niño impacts that never materialized.  Spot prices fell by 9.4% while the reinvested futures contracts returned -18.8%.  Soy futures don’t show such large discrepancies, however, as the market didn’t anticipate the impact of El Niño as well (Figure 4).  Soy prices soared in April, May and early June, partly as a result of heavy rains and crop damage in Argentina and Brazil as El Niño wound down. 

Figure 5: Reinvested Futures Returns Rolled 10 Days Prior to Expiry in 12 Months After El Niño Begins.

Month El Niño Begins Corn Wheat Soybeans Soybean Oil Soybean Meal Rough Rice Live Cattle Feeder Cattle Lean Hogs Dairy
1: Aug '63 5.0% -0.1% 1.1%              
2: Jul '65 5.0% 17.7% 26.8%       4.7%      
3: Jan '69 -4.4% -3.5% -4.2%       16.6%      
4: Jul '72 72.6% 63.7% 112.7%       29.1% 30.3%    
5: Sep '82 45.2% -8.8% 36.8% 59.1%     10.3% -15.6%    
6: Nov '86 -12.9% -1.2% 11.3% 4.1%     24.5% 19.8% 34.3%  
7: Nov '91 -21.8% 2.3% -4.7% -2.8% -17.1% -26.3% 9.7% 15.0% 9.9%  
8: Dec '94 30.7% 21.6% 14.3% -3.0% 22.3% 15.7% 2.4% -10.8% 24.0%  
9: Jun '97 -13.4% -38.5% -5.2% 2.6% -18.1% -5.7% -11.4% -13.5% -23.1% 25.7%
10: Oct '02 -13.7% -21.8% 33.8% 22.9% 36.7% 33.7% 43.0% 25.7% -12.7% -1.8%
11: Oct '09 22.7% 15.7% 18.9% 19.7% 22.1% -12.6% 12.3% 4.7% 22.5% 11.7%
12: Jun '15 2.6% -18.8% 20.0% -10.7% 26.1% -2.3% -22.9% -27.4% 10.6% -9.4%
Average 10.4% 4.3% 22.0% 14.6% 9.2% 0.9% 14.1% 6.9% 9.2% 11.9%

Source: Bloomberg Professional and Calculations from CME Group Economic Research


Volatility tends to be close to historically average levels during periods of El Niño, but generally speaking, the stronger the El Niño the greater the volatility in agricultural goods prices.  The latest El Niño was no exception to this rule of thumb, particularly during the past three months as volatility spiked across corn, soy and wheat.  Corn’s realized volatility averaged 26.27% over the past year as measured by annualized standard deviation of daily changes in futures prices (Figure 6).  During the 12 El Niños since 1959, corn volatility averaged just 20.04%, and during normal periods (neither El Niños nor La Niñas) it averaged 20.68%.  

Figure 6: Realized Corn Volatility has Been Slightly Higher-Than-Predicted Given the El Niño Intensity.

Similarly, soy had a realized volatility of 24.09% from June 2015 to June 2016, about 2% above the historical norms for both El Niño and neutral periods (Figure 7).  This is closely in line with what one might expect given the intensity of the El Niño and the soy market’s behavior during the past 11 El Niños. 

Both wheat prices and wheat realized volatility have tended to be less impacted by El Niños than either corn or soy.  That said, the latest El Niño has coincided with somewhat higher-than-average wheat volatility of 26.69% from June 2015 to June 2016.  Historically, wheat’s volatility is close to 23% during the past 11 episodes of El Niño and during neutral periods. 

Figure 7: Realized Soybean Volatility has Been Close to Expectations Given the El Niño Intensity.

Figure 8: El Niño Impacts May Have Contributed to Higher Wheat Realized Volatility.

Figure 9: Implied Volatility on Corn and Soy Options has Soared Since April 2016.

We warned in a paper published in April 2016 that implied volatility might be set to spike in corn, soybeans and wheat options.  Implied volatility on options had sunk towards historical lows in early 2016, notably on corn and soybeans.  Indeed, as El Niño wound down, heavy rains fell in parts of South America, and volatility on corn and soy spiked to the upside, reaching levels not seen since 2012 (Figure 9).  Implied volatility on wheat options increased, as well, but not to the same extent.

High volatility might be the norm for the next few years, especially if the fading El Niño morphs into a powerful La Niña.  The most powerful El Niños of the past turned into La Niñas within 12-24 months.  This was the case following the 1972-73, 1982-83 and 1997-98 El Niños.  La Niña is associated with exceptionally high levels of volatility across grain and soybean markets.  Typically, the stronger the La Niña, the greater the volatility.  This will be the subject of our upcoming report: Will La Niña Roil  Agriculture Markets? 


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

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