When El Niño caused bad weather in Africa and North America in 1997-1998, it resulted in failed crops, thus leading to sharply rising prices of coffee, cacao, grain, soy beans and sugar. Damage to US agricultural production was estimated at USD $9 billion. In fact, El Niño is even capable of causing floods in Southeast Asia, threatening local palm oil plantations. With this knowledge in mind, global investors have already been preparing for possible weak harvests since the start of 2014. As a result, prices of certain food products have risen sharply: corn rose 15 percent, sugar 11 percent, soy beans 10 percent, palm oil 9 percent, cacao also 9 percent, and grain 6 percent.

Climatologists claim (based on temperature measurements) that there is a big chance on a new El Niño in 2014-2015. Some indicate chances on a new El Niño in 2014-2015 are more than 50 percent.

Apart from concern about a possible new El Niño, higher commodity prices are also brought about by ongoing political tensions in Ukraine as this country is an important source of corn and wheat. A possible disturbance of the corn and wheat supply from Ukraine leads to the current speculation on international markets. Head of Benelux ETF Securities Philippe Roset says that "commodity prices have fallen sharply - some by 40 percent - in the past three years. Investors now see more upward potential than downward potential of these prices. In this context, when there is a chance of supply disturbances (such as tensions in Ukraine or the effects of a new El Niño), it will translate into higher commodity prices."

Coffee is a remarkable story. Due to severe drought in Brazil (the dominating force in coffee bean production), coffee bean harvests have failed. This year, coffee demand will exceed coffee production as Brazilian farmers will produce less of this commodity. As such, the price of coffee has skyrocketed almost 80 percent since the start of the year. When asked whether this high coffee price will last, Roset answered "in recent years the government of Brazil has bought enormous quantities of coffee in order to stabilize the coffee price. With the current weak harvests, the government can decide to sell part of these stockpiles, thereby placing downward pressure on the global coffee price."

Further Reading:

Overview of Palm Oil in Indonesia
Analysis of Coffee in Indonesia
What are the most Important Commodities of Indonesia?
Natural Disasters in Indonesia