Long-term weather pattern may roil coffee, energy

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INCREASED FROSTS IN BRAZIL, DAMAGING the vital coffee crop. Colder annual and winter temperatures in the U.S., with harsh winters leading to a surge in energy and natural-gas demand. Severe drought in the Southwest U.S., producing water shortages in southern California, Nevada, Arizona and New Mexico, while stressing water resources for hydro-electric power and human consumption.

Sound crazy? No, these aren't predictions from Nostradamus. These are some weather phenomena that occurred during the last negative phase of the Pacific Decadal Oscillation, a large-scale climate cycle responsible for tremendous influence on global weather patterns. The bad news is that we are advancing again into a new negative phase of the PDO, with this cycle forecast to continue through the next 20 years.

DJ-AIG Commodity Indexes
DJ-AIG Indexes 5/23 5/16 YTD
Commodity Futures 118.848 119.488 8%
Total Return 202.886 203.936 8%
Energy 232.187 230.708 18%
Petroleum 189.473 187.802 7%
Livestock 62.610 64.169 -4%
Grains 53.685 55.572 5%
Industrial Metals 63.292 63.217 7%
Precious Metals 63.224 61.964 3%
Softs 73.204 72.999 -3%
Dow Jones/AIG International

The PDO is a pattern of Pacific climate variability with two distinguishable phases, a cool phase (negative) and a warm phase (positive). The normal length of each phase is 20 to 30 years, which is a much longer duration than the smaller-scale El Nino/Southern Oscillation cycle of six to 18 months.

There have been two full Pacific Decadal Oscillation cycles in the past 113 years, with the cool phases in 1890-1924 and 1947-1976. Warm phases were noted from 1925-1946 and again from 1977-1998. We are moving into a negative phase, with the peak expected around 2007 and a shift back into the positive phase projected to occur around 2016.

So, how can this cool PDO phase affect our weather patterns and ultimately the commodities markets over the next 20 years?

Coffee, for one, could be heavily influenced. Major producing regions of Brazil could be more susceptible to damaging frosts, leading to an increase in the number of coffee-price spikes.

Since 1900, Brazil has experienced 17 frosts or freezes, which have hurt coffee production significantly; 13 of these events occurred during the last cool phase of the PDO, from 1947-1977.

Frosts and freezes are likely to occur more often through 2016-2020. However, the damage to the Brazilian coffee crop may not be as severe as in 1947-1980 because of the movement of the crop into warmer, more northerly areas. Despite this reduced vulnerability, frosts and freezes in the next 20 years are still likely to increase price volatility.

And what effect will this cool Pacific Decadal Oscillation phase have on the U.S.? Two things are likely to occur throughout the next 20 years.

First, there will be an increase in the number of cold, or extreme, winters, very similar to those that occurred during the period from the late 1940s to the late 1970s. Second, the colder winters will lead to an overall bias of cooler-than-normal annual temperatures throughout the contiguous U.S. into the 2016-2020 period. Finally, knowing a cool phase of the PDO is responsible for weaker El Ninos and stronger La Ninas, the Southwestern U.S. will experience drought as winter rains diminish.

Key Commodity Indexes
CRB Group Indexes 5/23 Prev. Wk Yr. Ago
CRB Futures 239.70 241.33 202.35
Industrials 188.24 189.28 155.91
Grain/Oils 195.23 201.89 163.15
Livestock 248.37 253.28 203.56
Energy 337.18 339.54 265.32
Precious Metals 300.38 296.85 273.73

During the last cool PDO phase, the national temperature of the contiguous United States dipped to some of the lowest readings in the past century with the period of the late 1970s being by far the coldest since 1900. That cool phase also produced a sustained period of below-normal rainfall across Arizona and portions of New Mexico, Nevada and southern California, leading to the substantial drought of the 1950s.

If these events do occur, there's likely to be increased demand for energy and natural gas, as businesses and residences are forced to use more heat throughout the year. The trend for below-normal rainfall in the southwestern U.S. could also affect the energy markets, as low river and reservoir levels hurt hydroelectric-power generation.

No one knows if these events will materialize as forecast, but one thing is likely -- the weather patterns we have become accustomed to over the past 20 years during a warm PDO phase will probably return to weather patterns more like those found in the 1950s, 'Sixties and 'Seventies.

For most people old enough to recall the harsh cold winters of the late 1970s, a return to that sort of weather is not anything to look forward to. Quite possibly the best investment of all over the next 20 years could be an excellent snow shovel and a warm, down-lined winter jacket.

JEFF THOMPSON is a meteorologist with Global Weather Services. GWS is owned by Oster Communications, joint publisher of OsterDowJones Commodity News.

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