Agriculture, An Asset Worth Harvesting

We ended the most recent article “Do Not Say You Were Not Warned – Again” with the 720 Global tag line –“At 720 Global, risk is not a number. Risk is simply overpaying for an asset”. The phrase hints at one of the most important and ironically, least followed rules in money management – limit ones losses. Like many important lessons, this is much easier said than done. The million dollar question facing investment managers that understand the value of this proposition is – how do you limit or prevent losses without constructing a portfolio comprised primarily of bonds and/or cash? In the past we have focused on more traditional strategies to answer this question. This article focuses on an alternative asset class, agriculture. The possible transition from a record breaking El Nino to a La Nina pattern may be a significant variable affecting commodity prices. Understanding this meteorological cycle change can give investors an edge in seeking unique assets with promising risk/reward scenarios.

La Nina and El Nino (The Girl and The Boy)

To succinctly summarize the two climatological conditions we provide a short description and visualization from the National Oceanic and Atmospheric Administration’s (NOAA):

El Niño refers to conditions when the sea’s surface in an area along the equator in the central and eastern Pacific Ocean gets warmer than usual. The average water temperature in that area is typically just 1-3°C (about 2-5°F) warmer than normal, but it has the effect of adding huge amounts of heat and moisture to the atmosphere, ultimately affecting patterns of air pressure and rainfall across the Pacific and beyond.

La Niña is the climatological counterpart to El Niño-a yin to its yang, so to speak. La Niña refers to periods when sea-surface temperatures in the equatorial central and eastern Pacific are cooler than normal. The lower surface temperatures suppress transfer of heat and moisture to the atmosphere, again affecting air pressure and precipitation patterns across a large region.