MELBOURNE: Palm oil, sugar, cocoa and wheat are among crops that may be hurt most by an El Nino this year, according to Barclays plc, which said commodity markets haven’t fully priced in the risks.

About a 20% probability of a strong El Nino is reflected in soft-commodity markets, compared with the 60% to 70% odds seen by meteorologists, analysts led by Ephrem Ravi wrote in a report yesterday. The weather pattern may boost earnings at companies from Noble Group Ltd to Wilmar International Ltd and their shares may rally, Ravi wrote.

El Ninos can roil agricultural markets by parching parts of Australia and Asia while bringing rains to South America, and Australian forecasters issued an alert this week saying the event may start in July. ABN Amro Group NV said a confirmation may trigger support for coffee, sugar and cocoa.

“We are not meteorologists and have no view whether El Nino will definitely occur,” Ravi wrote, while describing the discrepancy between the predicted odds for an El Nino and soft-commodity pricing as surprising. “[An] increase in soft-commodity prices is obviously good for the earnings and cash flows of the upstream producers,” he added.

Palm oil lost 3.5% to RM2,567 a tonne this year on Bursa Malaysia Derivatives. Sugar rose 5.2% in New York, while cocoa gained 7%. Arabica coffee surged 82%, the best performer in the Standard & Poor’s GSCI gauge of 24 commodities because of drought in Brazil, the world’s largest producer.

El Ninos, which are caused by the periodic warming of the tropical Pacific Ocean, occur every two to seven years and are associated with warmer than average years. The last El Nino was from 2009 to 2010, and since then the Pacific has either been in its cooler state, called La Nina, or neutral.

Soft-commodity prices rally on average by 10% to 40% during El Ninos, according to Barclays, citing six events since 1986. Sugar and coffee prices rose the most during those episodes as the production is concentrated in areas where El Ninos have the most impact, the bank said, listing Southeast Asia, India and South America.

An El Nino may hurt palm oil yields, potentially following damage caused by dry weather in Indonesia and Malaysia in the first three months of the year, Barclays said. Over the past three events, prices advanced an average of 32%, it said.

“There is still significant upside opportunity in Noble, Wilmar and Golden Agri,” Ravi wrote. Trading companies may benefit from increases in volatility and sourcing commodities from non-traditional areas, according to the report.

Shares of Singapore-listed Wilmar, the world’s largest palm oil processor, advanced 0.9% to S$3.33, paring this year’s loss to 2.6%. Noble, Asia’s biggest commodity trader by sales, rose 0.4% to S$1.25, taking this year’s advance to 17%.

Golden Agri-Resources Ltd, the biggest palm oil producer in Indonesia, may benefit from an El Nino as higher prices more than offset lower output, Barclays said. Its shares have risen 8.3% to 59 Singapore cents this year.

This article first appeared in The Edge Financial Daily, on May 9, 2014.