Weather has always been a key factor influencing commodity prices, even though not very obvious at first glance. Agricultural yields depend on rainfall, frost can ruin crops, and hurricanes disrupt supply chains. However, 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 once anomalies into regular disruptions. Such shifts have forced traders to reconsider traditional approaches to pricing and risk management. Below, we delve into three striking examples of weather-driven volatility in 2023-2024: orange juice, robusta coffee, and cocoa.
Orange Juice: A Perfect Storm in Brazil
In 2023, orange juice emerged as an unexpected centerpiece of market volatility. Brazil, the world’s largest orange producer, faced a combination of ruthless drought and the spread of citrus greening disease, known locally as citrus greening disease, or huanglongbing (HLB). These twin crises severely impacted orange yields, with entire orchards suffering from wilted fruit and reduced productivity.
The impact 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 a La Nina cycle—had already set the stage for reduced water availability. Adding to the woes, citrus greening further exacerbated the damage, creating supply shortages that traders struggled to adjust to as many market participants were caught off guard by the magnitude of the price spikes.
Meteorological data painted a clear picture of the challenges:
In 2022, the Oceanic Niño Index (ONI) consistently indicated a La Niña phase, with values between -1.0 and -0.5, signaling cooler-than-average sea surface temperatures in the central Pacific. This pattern contributed to reduced rainfall across Brazil, exacerbating the drought and stressing irrigation systems for orange orchards.
By early 2023, the ONI shifted into neutral territory, suggesting a weakening La Niña. However, as the year progressed, it surged into positive territory, marking the onset of a strong El Niño. With values climbing to between +1.0 and +2.0, El Niño 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 even more vulnerable.
By late 2023, as El Niño peaked, orange yields had plummeted. Although ONI readings began to decline in 2024, signaling a potential easing of the El Niño 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%, totaling 1.5 million 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 markets were jolted by a crisis centered in Vietnam, the top producer of Robusta coffee. The Central Highlands, known for their vast plantations, were hit by an unprecedented drought, reducing 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 futures seeing dramatic swings as traders grappled with supply constraints.
In numbers, everything went as follows:
Vietnam’s Robusta production dropped by 2.6 million bags in 2023, falling to 27.2 million 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 to 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 meters above the dead water level, forcing the station to operate at only 40% capacity. Notably, Robusta prices 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 market's volatility presented opportunities to capitalize on rapid price shifts.
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.
How did it affect the prices?
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 stabilize production. Profit-taking by market participants and softened global demand, driven by the high price levels, also contributed to the correction. Nevertheless, cocoa prices remained historically elevated.
The market’s volatility was reflected in trading activity. The CFTC commercial net position fluctuated sharply, with hedging and speculative activity increasing by 30–40% in response to tightening supplies. The CFTC Cocoa Futures & Options Long/Short (L/S) Ratio spiked to 4 during 2023–2024, reaching multi-year highs as traders adjusted to the volatile environment.
Thus, Harmattan proved that it could change markets with the force of a sandstorm.
Conclusion
The volatility observed in commodity markets during 2023–2024 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 globalized 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 the tools to interpret these patterns, numerous possibilities open up. For others, the risks of inaction are clear and growing.
Source: Broker Mind Money
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