With the recent bout of devastating weather events including drought, frost, fires, flooding and heat, we are reminded of the potential for more frequent and extreme climate variability in the years ahead. Market dislocations due to weather have the potential to occur more frequently and more severely, impacting food prices around the globe. While much attention is paid today to socially responsible investing often referred to as ESG or Environmental, Social and Governance, there are strategies with the potential to harness and profit from increasing volatility as a symptom of climate change.
Trend following investment strategies seek to capture price trends across asset classes and are agnostic as to the direction whether long or short. Without relying on fundamental data, these strategies are disciplined and repeatable processes well suited to participate in unexpected price trends across global markets.
In mid-July, frosts unexpectedly hit the coffee growing regions of Brazil, the largest exporter of coffee in the world. Analysts estimate the losses to be between 4% and 20% of the total crop. Coffee prices subsequently spiked more than 20% in two days and have risen over 60% in the past year.
Coffee (KC) – One Year Daily Chart
Canada is the world’s largest producer and exporter of canola. However, severe heat and drought have decimated this year’s crop with production expected to decline by 34%. From mid-June to mid-July, canola prices rose more than 35% while nearly doubling over the past year. It’s expected to be Canada’s smallest canola crop since 2010.
Canola (RS) – One Year Daily Chart
Farmers in the US have been planting fewer oats in recent years and replacing them with more profitable crops like corn. Reduced planting of oats combined with recent drought conditions is expected to yield the lowest crop since records began in 1866. In response, oats prices have risen more than 80% in the past year.
Oats (O) – One Year Daily Chart
World food prices have surged more than 31% in the past year. Supply disruptions related to the pandemic combined with severe weather events are exacerbating the rise in food and agricultural commodities. With 95% of the US West in some state of drought, extreme weather is likely here to stay and even intensify in the decades ahead. For years, food companies have utilized the futures markets to hedge risk associated with rising and falling commodity prices. With climate change further exacerbating conditions, trend following strategies across agricultural commodities presents a way to hedge risk and potentially profit in an increasingly uncertain world.