La Niña: Calm Before the Storm in Ag Markets?

Corn, soybean and wheat markets are witnessing an odd juxtaposition – the onset of a La Niña and exceptionally low options’ implied volatility (Figures 1 & 2).  Why this is unusual is that corn, soybeans and wheat often experienced exceptionally high volatility (about 1.3-1.5x normal) during many of the past eight La Niña episodes (Figures 3, 4, 5).  As such, one could wonder: are markets being complacent in the face of approaching danger?

Figure 1: Corn and Wheat Volatility Remains Low.

Figure 2: Soy Complex Volatility is Also Historically Low.

3: La Niña Often Implies an Exceptionally High Level of Corn Volatility

Figure 4: Soy Volatility Tends to be Exceptionally High Under La Niña.

That question, however, is remarkably difficult to answer for two reasons.  First, we don’t know how strong the current La Niña episode will turn out to be and, secondly, the geographical distribution of agricultural production has changed over the past few decades, with South America displacing the U.S. as the primary exporter of corn and soybean, while Russia and Ukraine have similarly replaced the U.S. as the primary wheat exporter.  As such, market responses to the past eight episodes of La Niña, most of which saw the U.S. as the dominant global exporter, may not be as relevant this time around.  Likewise, La Niña may not be as bearish for agricultural goods this time as in most past episodes.

Figure 5: Wheat Also Tends to be Exceptionally Volatile During La Niñas.

So, how seriously should we take the current La Niña episode?  By the end of November, temperatures along the Central and East Central Pacific Ocean had fallen 0.9° C below their long-term average and appear to have fallen further since then, crossing the threshold of 1° C below normal, qualifying by our admittedly arbitrary definition of being a “major” La Niña (Figure 6).  At the moment, however, this would qualify as one of the mildest La Niñas on record. Previous episodes of La Niña impacted the volatility of agricultural markets roughly in proportion to the strength of the La Niña episode.  Mild La Niñas led to mild volatility, powerful La Niñas often led to high volatility (Figures 7, 8, 9).  As such, unless the current La Niña becomes significantly more pronounced, there is little reason to fear the worst (most volatile) possible outcome.

Figure 6: The Most Recent El Niño Tied the 1997-98 Episode in Strength and is Rapidly Fading.

Figure 7: Stronger La Niñas Often Imply Higher Levels of Realized Corn Volatility.

Figure 8: The stronger the La Niña, the More Likely an Exceptionally High Level of Soy Volatility.

Figure 9: The Stronger the La Niña, the More Likely Exceptionally High Realized Wheat Volatility.

To understand where the current La Niña is heading, one can check the National Oceanic and Atmospheric Administration’s sea surface temperature anomaly maps.  At the moment, they show cold water around the equator but not at more northern latitudes off California (Figure 10).  This differs significantly from the depths of the 2010 La Niña, which showed cold weather across most of the Pacific Ocean for many thousands of miles off the west coast of the Americas (Figure 11).

Figure 10: Current La Niña as of February 5, 2018.

Figure 11: The Bottom of the Previous, Powerful La Niña on November 15, 2010.

Since 1959, the world has experienced eight significant episodes of La Niña and 12 significant episodes of El Niño.  Figure 12 shows what happened, on average, to the inflation-adjusted spot prices of agricultural goods in the 12 months after the past dozen El Niños and past eight La Niñas reached our 1°C significance threshold.  The result is clear:  El Niño tends to be bullish for crop prices whereas La Niña tends to be bearish.  Soybean products (oil and meal) have all tended to react more strongly to El Niños and La Niña than most of the other agricultural goods that trade at CME and CBOT.

It should be noted, however, that among the eight previous episodes of La Niña, there has been a wide variety of price responses from one episode to the next and from one product to another.  This makes sense to us for several reasons.  First, no two La Niñas are exactly alike.  Each one had a differing degree of intensity and a unique duration.  Second, each La Niña had its own impact on temperatures and precipitation in the world’s various crop growing areas.  Finally, each La Niña occurred during its own set of economic circumstances.  The most recent La Niña in 2010, for instance, occurred at a time when the U.S. Federal Reserve was initiating its (near) zero rates and quantitative easing policies.  Commodity prices and equity markets soared in 2009 and 2010, taking the prices of most agricultural goods higher along with them despite whatever impact the La Niña might have had.

Figure 12: Real Spot Price Average Change in 12 Months After El Niño / La Niña Crosses 1°C Threshold.

Figure 13: A Wide Variety of Outcomes from One La Niña to Another.

Change in Inflation Adjusted Spot Prices for 12 Months After a La Niña Passes -1°C Threshold
La Niña Episode Beginning In Corn Wheat Soybeans Soybean Oil Soybean Meal Rough Rice Live Cattle Feeder Cattle Lean Hogs Dairy
1: January 1971 -28.3% -5.7% -0.9%              
2: August 1973 6.7% -18.6% -22.1%       -28.5% -65.6%    
3: July 1975 -6.5% -14.2% 7.9%       -20.5% 17.5%    
4: December 1984 -10.7% -4.4% -15.6% -26.2%     -8.7% -7.7%    
5: June 1988 -15.5% -0.3% -31.3% -34.4%     -2.1% 8.9%    
6: September1988 1.1% 3.7% -8.7% -39.3% 10.1% -49.0% 8.6% 14.8% 10.5% -1.8%
7: October 2007 8.7% -45.2% -11.0% -14.3% -8.9% 26.8% -9.0% -14.0% -1.4% -16.8%
8: August 2010 10.8% -13.4% 0.3% 4.4% -5.8% 14.3% 17.5% 24.6% 19.7% 4.2%
Average -4.2% -12.3% -10.2% -22.0% -1.5% -2.6% -6.1% -3.1% 9.6% -4.8%
Source: NOAA, National Weather Service, Bloomberg Professional (C 1, W 1, S 1, BO1, SM1, RR1, 
LC1, FC1, LH1 and DA1, CPI INDX), Calculations Done by CME Group Economic Research

The bull market during the 2010 La Niña episode may also have been related to changes in the global distribution of agricultural production. South America is a much larger producer of corn and soybeans than in the past. While La Niña may contribute to ideal growing conditions in North America, it could cause weather disturbances in South America that could actually be bullish, rather than bearish, for crop prices.

Bottom Line:

  • Past La Niñas have tended to be bearish for crop prices but there has been a wide variety of responses from one episode to the next.
  • Crop prices are already fairly depressed, so if a La Niña develops, there is no guarantee that prices will fall further.
  • The boom in South American production of corn and soy could offset or even negate the impact of La Niña on North American production.
  • The boom in Russian and Ukrainian wheat production might also stabilize the market, partially inoculating it from potential La Niña impacts.
  • La Niña tends to correlate with exceptionally high levels of volatility in agricultural markets that far outpace realized volatility experienced during El Niños and during neutral periods, when the Oceanic Niño Index (ONI) is between -1°C and +1°C of its seasonal normal.
  • Generally, the stronger the La Niña, the higher the degree of volatility in agricultural markets.
  • Options markets appear to be complacent, not pricing a return to even normal, much less exceptional volatility.


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.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

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