Winter is coming! A phrase that holds as much fear for consumers and producers of commodities as it does for members of Westeros’ beleaguered Night’s Watch. But as Michael Schwartz at Eka Software Solutions argues here it’s not the undead White Walkers of George R. R. Martin’s imagination that agricultural companies need to worry about - it is the possible return of the very real polar vortex and the market volatility it creates.

The polar vortex became part of the American vocabulary for the first time in winter 2014, as households along the Eastern seaboard and parts of the Midwest saw their communities battered by unprecedented storms and low temperatures.

On January 6, 2014, temperatures in these regions dropped to an average of minus ten degrees Fahrenheit, with a wind chill of minus 33 degrees Fahrenheit, according to reports from PJM Interconnection, a regional power transmission organization. The next day, temperatures dropped to a record-breaking four degrees in Philadelphia, ten degrees in Richmond, and minus 16 degrees in Chicago. 

2015 didn’t fare much better. The polar vortex tag was dropped, but it got just as cold. Again, PJM Interconnection’s data showed that numerous cities in the East and Midwest hit the record for daily low temperatures during February 2015.

The age of extreme weather

While the East coast of America is preparing for the possibility of another polar onslaught, farmers in California are desperate for rainfall after four years of drought. In the past year, the state’s record drought has led to a water deficit of 62 trillion gallons in western states, and the total losses to crop revenues are estimated to come to $902 million in 2015[1].

They might get their wish – after months of speculation, a strong El Niño that is forming in the Pacific Ocean, which reports now suggest could rival its 1997-1998 predecessor, and which could knock any return of the polar vortex off the top spot for big weather story of the season.

We don’t know for sure whether either of these events will return this winter. We don’t know what the impact would be. But what we do know is that extreme weather events like these are becoming more and more common. According to the World Economic Forum, the past year has seen the following extreme weather events:

  • Devastating flooding in the UK, which was caused by the worst winter rainfall in the last 248 years
  • Severe flooding in Bosnia, which was caused by the country’s heaviest rainfall in 120 years
  • The largest tributary of the Amazon River reaching record levels and causing the worst flooding in the region for 100 years
  • The strongest typhoon to hit Southern China in 40 years
  • The worst snow storm in Tokyo in 45 years
  • Temperatures hitting an all-time high in 34 locations in Australia

Volatility is the new constant

Last year was not an outlier or a freak occurrence. What were previously regarded as once-in-a-lifetime events are increasingly becoming once-a-year events. Record-breaking hot days that were previously expected once every 20 years are now likely every other year. According to a special report from the 220 scientists on the UN’s Intergovernmental Panel on Climate Change (IPCC), extreme weather events have been increasing in length, frequency, and intensity in past decades – and are projected to continue that increase throughout the 21st century.

In other words, the only thing certain about the weather is that it is becoming more volatile. Against a background of fast-changing patterns in global demand and increasingly lengthy and complex supply chains, extreme weather is only adding to the volatility in wholesale prices for ags and softs. For example:

  • Between 2010 and 2012, weather extremes resulted in excessive rainfall and flooding as well as severe drought, which caused major agricultural commodity production - including wheat, corn, cotton, and sorghum - to swing between 10 and 80 percent[2].
  • In July 2012, the prices of internationally traded maize and soybeans reached an all-time high – according to the World Bank – following an unprecedented summer of high temperatures and low rain-fall in the US and Eastern Europe. At the same time, wheat prices soared to the peak levels of 2011.
  • Since then, things have reversed. World Bank figures show international wheat prices dropping 18 percent between August 2014 and May 2015, to finish 36 percent below May 2014 levels. The international price of maize also fell six per cent, following price swings throughout the second half of 2014. Prices of maize were 23 per cent lower in May 2015 than in May 2014.

There is a long-term impact to these kinds of events as well. In its 2012 paper, "Extreme Weather, Extreme Prices", international NGO, OXFAM modeled the impact of extreme weather such as droughts, floods, and heat waves on the prices of key international staple crops. Its research shows that extreme weather events in a single year could bring about price spikes of comparable magnitude to two decades of long-run price rises.

Of course, the latest figures also have to be considered against a backdrop of a falling oil prices, currency fluctuations, and tensions in Ukraine and Russia – which only add to the complexity and volatility involved. Nonetheless, with extreme weather volatility becoming a way of life, commodities companies face huge risks, which increase proportionately to the complexity of the market. Sudden spikes in prices impair forecasts and have a negative impact on the bottom line. And without the right information made available at the right time, the ability to operate profitably is a matter of luck rather than judgment.

Survival through data analytics

For any business for whom the wholesale price of agricultural commodities is a major input cost needs access to large data-sets to inform their purchasing and procurement decisions. But that access must be in real time, and the data being accessed must be relevant. Without the appropriate tools in place, that’s an impossible task.

As in every other industry sector, the promise of Big Data and the insight that it can deliver can only be realized with significant analytics capabilities to turn raw numbers into actionable information. Without it, the data is just too big and too impenetrable to support optimal decision-making.

The need for advanced analytics is being addressed by a new generation of smart commodity management solutions – like those from Eka Software Solutions – that address the problems of today’s international commodity markets. Driving the evolution in commodity management, and built with understanding of the commodity markets baked in, these smart systems now offer more predictive as well as traditional slicing and dicing of historical data. These are based on user-controlled analysis to help manage volatility at each stage of the supply chain.

By bringing predictive analytics to the business of agriculture, these systems are tapping into a much broader trend. Research from MIT[3] has shown that two thirds of companies report competitive advantage from the use of analytics. Management consultants, Accenture, have also issued research that shows greater use of analytics helps firms to cope with the inexorable acceleration in the pace of change, and that any company that hopes to surpass its competitors in the race to keep up with change needs analytics on its side[4].

Next-generation systems therefore offer, among other features:

  • Built-in commodity-specific intelligence, which enables agricultural companies to get answers to the questions most important to them
  • Data eco-systems that are built for Big Data and which can process large sets of data quickly
  • The ability to create custom analytics without help from IT teams
  • Availability through both on-premise and in-cloud systems, as well as desktop and mobile devices

Importantly, these systems can incorporate a significant amount of information from external as well as internal systems – including meteorological and weather data. By simulating, visualizing, and helping to optimize any number of potential scenarios based on accurate information, companies in the commodities markets can make much better decisions in even the stormiest of conditions. Oxfam suggests that we need to stress test the global food system for weather changes just as banks are now routinely stress tested. It makes sense for everyone involved in global commodities and food supply. Because whatever the winter brings, and whatever next summer looks like, the long-term outlook is stormy indeed.

[1] Richard E. Howitt, Duncan MacEwan, Josué Medellín-Azuara, Jay R. Lund, Daniel A. Sumner (2015). “Economic Analysis of the 2015 Drought for California Agriculture”. Center for Watershed Sciences, University of California – Davis, Davis, CA

[2] Anyamba, Assaf et al. “Recent Weather Extremes and Impacts on Agricultural Production and Vector-Borne Disease Outbreak Patterns.” Ed. Tetsuro Ikegami. PLoS ONE 9.3 (2014): e92538. PMC. Web. 13 Oct. 2015.

[3] From Value to Vision: Reimagining the Possible with Data Analytics

[4] Analytics in Action: Breakthroughs and Barriers on the Journey to ROI