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Betting on Mother Nature
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December 10, 1997: 10:51 a.m. ET
Investors hope El Nino will improve their odds playing commodities
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NEW YORK (CNNfn) - Matt Sherwood didn't make any money after two years of playing the commodities market, but when he started reading about the weather system known as El Nino, he thought he had found something that would improve his odds.
He took a chance that a drought would scorch China's corn crop and bought a futures contract for $500. In three days, he made a $900 profit.
"El Nino is going to enhance my odds," said Sherwood, 32, a factory worker from upstate New York. "I hope it's going to be a good money-making opportunity."
Trading agriculture commodities isn't for the faint of heart. You bet that the price of a commodity like corn will rise or fall. It sounds easy, except the biggest factor for crop yields is the weather -- and nothing is more unreliable, leaving investors with dizzying profits or staggering losses.
Looking for an edge
Many investors like Sherwood are hoping El Nino will give them an edge. They're buying oil contracts because they think it will be a cold winter. They're eyeing soybeans in India because of the monsoons. They're watching cocoa in Africa.
The question is whether El Nino will live up to its billing. "El Nino is more of an art than a science," said Daniel Basse, a commodities analyst with AgResource Co. in Chicago.
El Ninos happens when Pacific trade winds shift and send warm water in the opposite direction. It comes along every two to seven years, triggering floods, drought and fires in different parts of the world. The last El Nino in 1982-83 caused $13 billion in damage.
"It has a tremendous influence," said Joe Lemel, a vice president at Alaron Trading in Chicago. "It's a major world weather event."
Not all El Ninos are alike, however. And not all trades based on El Nino theories have panned out, according to brokers and analysts.
Not a 'sure thing'
Consider what happened to investors who were betting several months ago that the Australian wheat crop would fail. In the last El Nino, Australian wheat was devastated by drought, Basse said. Analysts expected a paltry crop of about 12 million metric tons. So in August, people were betting on wheat prices going up. Then the unexpected happened: massive rain.
"The heavens opened and the rains started," Basse said. The result? The Australian wheat crop came in at a healthy 18 million metric tons -- and the price dropped 50 cents a bushel.
That means an investor who bought 10,000 bushels of wheat at $3.80 a bushel in August might have sold at $3.60 a bushel, meaning his losses would have been up to $2,000.
The same outcome happened in India, where El Nino didn't produce a drought as it was expected to, said Steve Bruce, a commodities trader in Chicago. Instead, heavy rainfall resulted in a record soybean crop.
Bruce is seeing a lot of new investors -- he calls them 'neophytes' -- who are studying El Nino's past performances for hints on what to buy.
"We're seeing a lot of speculative money coming in," Bruce said. "Anyone who's bought in this market on the belief of El Nino devastation has lost money."
On the other hand, more experienced investors who are selling contracts on the theory that El Nino will be a bust are making money, he said.
Make friends with your meteorologist
Most analysts recommend against trying to bet on El Nino or any other event triggered by Mother Nature. Judy Gaines, an analyst with Merrill Lynch, said she did a study of El Nino and concluded there's more hype than fact. She doesn't believe El Nino is having an effect on the markets.
"It's not smart to bank on El Nino," Gaines said. "It's extremely uncertain."
But for the hardy investors, the best advice is to follow the weather closely, said Jim Roemer, a commodities trader and owner of Roemer Weather, a weather forecasting company.
"You really have to be talking to a meteorologist every day," he said.
-- By staff writer Martine Costello
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