El Nino Is Coming: Are You Prepared?

El Nino, the periodic phenomenon of unusually warm Pacific Ocean surface temperatures, carries a lot more mystique than the average shift in weather. This is because it can seriously disrupt global weather and thus impact many industries. Drought in Australia, Asia, and West Africa can hurt crop production, while excessive rain can hurt South American agriculture. The side effects of a warmer Pacific could also severely damage fish populations, reduce Atlantic hurricanes, and increase the price of nickel.

There are plenty of other businesses that face changing fortunes amid a 65%-plus chance that El Nino will occur this summer. Can you profit from the change in weather?

Typical El Nino weather variations. Source: NOAA.

Food providers and producers
If commodity prices increase, then both consumers and consumer-focused companies will have to absorb higher prices. Coffee, most of which is produced in South America, could particularly be affected by El Nino. Would a bet against coffee companies pay off?

Probably not. It's a well-prepared industry, as Starbucks  (NASDAQ: SBUX  )  and other coffee-dependent companies buy coffee far in advance. Starbucks has already almost completely met its coffee needs for 2014 and has covered 40% of its needs for 2015. And El Nino typically only lasts between nine and 12 months, though in the past it has persisted for up to four years. In addition, Starbucks' operating margin was a comfortable 16.6% last quarter, giving the company plenty of buffer from any shock to coffee costs -- especially since that product represents less than 10% of its total operating costs.

Insurers
During the El Nino of 1997, there were only three Atlantic hurricanes, while the devastating 1998 hurricane season saw 10 and occurred during a La Nina (an unusually cold Pacific Ocean). In fact, during an El Nino, the probability of two hurricanes making landfall in the U.S. is only 28%, versus a neutral year's 48% and a La Nina year's 66% odds. Similarly, the odds that a storm will cause over $1 billion in damages during an El Nino, neutral year, or La Nina is 32%, 48%, or 77%, respectively.

A weak hurricane season like last year's could give insurers a boost via fewer catastrophic losses. Travelers (NYSE: TRV  ) , for example, incurred about $500 million in hurricane and tropical-storm losses in 2011, but over $1 billion in 2012 due to Hurricane Sandy. With fewer claims and expenses in 2013, net income increased to $3.6 billion -- well more than the $2.4 billion earned in 2012 and $1.4 billion in 2011.

It is not known if a weak hurricane season is priced into insurers' stock prices. However, any bet on weak hurricanes should be tempered with the possibility of flooding elsewhere -- and the fact that catastrophic storms can still hit no matter the temperature of the Pacific.

The chance to profit is slim
Due to the erratic nature of the weather, any financial bet would be speculative, rather than a true investment. Also, many industries are already intimately aware of the challenges weather can present and have hedged against trouble. Additionally, due to El Nino's typically short duration, any bet on the weather would lack the benefits of long-term investing.

If anything, a company that hedges well and manages risks like El Nino might indicate solid management and a company worthy of further research.

In fact, you can read about a few energy companies with great dividends that may actually do better when El Nino comes knocking. You can read about them by clicking here. 


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 17, 2014, at 7:36 AM, FactChecker2 wrote:

    Look at the first map. The December through February effects in Texas are supposed to be "Wet and Warm". We have been in severe drought.

  • Report this Comment On May 17, 2014, at 7:38 AM, FactChecker2 wrote:

    Correction: The prediction was "Wet and Cool" in Texas from Dec through Feb., not "Wet and Warm". Sorry. Still, we are in severe drought.

  • Report this Comment On May 17, 2014, at 10:52 AM, kennyhobo wrote:

    Climate prediction is clearly junk science today. The Global Warming fraudsters have to present Global Warming or they will lose their funding. All of their models have been proven wrong to the standards of 8th grade science. If the data doesn't fit the hypotheses, the theory is WRONG. NASA and NOAA have been predicting hurricane seasons for years. They are basically always wrong! Why aren't they held accountable by the media? Because the media loves sensationalism, even if it is a lie. Take your local journalist to lunch ... boil them for stew.

  • Report this Comment On May 17, 2014, at 2:31 PM, clearfog wrote:

    Who could possibly make accurate predictions in complex chaotic systems? Oh yeah, those "junk science" computer models, which made this prediction a year ago. Damn, they are going to put Deniers out of work, or in an asylum where they belong.

    Bad news Deniers, this El Nino will make your 15/16/17 year hiatus in ATMOSPHERIC (not GLOBAL) warming talking point in the trash heap of real junk science. Then what will you have? It ain't that bad? There is nothing we can do about it anyway? Goddidit?

  • Report this Comment On May 18, 2014, at 12:41 AM, AllenElliott wrote:

    Can they do anything about it? Nothing but holler climate change.

  • Report this Comment On May 18, 2014, at 2:39 PM, Rghitch4754 wrote:

    Factchecker2 - These are predictions of the effects El Nino may have....in late 2014 and 2015. In December 2014 (seven months from now)through January 2015 Texas may be wet and cool. Current drought conditions are irrelevant.

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