Western Europe has seen an unusual heat wave during the past month due to hot air coming up from North Africa. Extreme-weather events frequently drive agricultural production fluctuations, increase price volatility, and create uncertainty on agricultural commodity markets. We can quantify this impact using the share prices of agricultural firms in the Netherlands, the world’s second largest agricultural exporter valued at nearly €92bn last year, behind only the US. Our data shows serious concerns about food production due to the heatwave and drought. Put simply, smaller potatoes are not small potatoes for share prices of major agricultural players.
The unusually warm and dry summer so far has provoked forest fires in Europe from Greece in the South to the Arctic Circle in Northern Sweden. According to the United Nations Regional Information Centre for Western Europe, 85% of the area burned in forest fires in Europe is in major agriculture exporting countries in Southern Europe, like Croatia, France, Greece, Italy, Portugal and Spain (UNRIC, 2018).
An article funded by European Commission Research Centre on Sustainable Resources, Chatzopoulos et al. (2017) posits that weather events affect commodity markets through a two-fold impact on crop production. The direct effect is biophysical and pertains to yield reduction when crops are hit by extreme weather at critical developmental stages. The indirect effect boils down to altering the efficiency and perhaps the timing of input application. This two-fold impact dictates fluctuations in production and stock-to-use ratios as well as price volatility at least in the short run.
A crop shortfall is a relevant short-term consequence with corresponding long-term implications for both area (planted or harvested) and intensity (number of crops grown within a period of time).
While simulation models of regional agriculture typically assume normal weather in deterministic scenarios, the current heatwave has thrown out production forecasts. This has had a strong downside impact on agricultural firms.
At its most basic level, if investors observe that supply in commodities market is limited and profits are impacted, they foresee a fall in the earnings potential of the stock, which in turn reduces demand for the stock, resulting in lower prices.
If we define extreme weather by extreme temperatures, then days with average temperature below -2˚Celcius and above 23˚Celcius are considered extreme in the Netherlands. Since end of May 2016 until today, there are 52 extreme days registered in the Netherlands. The following table gives information about the average share price of three agricultural corporations – For Farmers NV, Wessanen NV and Amsterdam Commodities NV in normal days and extreme days since the end of May 2016.
Table 1: Average share prices of the three corporations: For Farmers NV and Amsterdam Commodity NV and Wessanen NV in normal and extreme weather
|Average Share Price|
As it can be noticed in the table above, the average share price for both of these corporations is slightly lower in days where weather is considered to be extreme. This effect can be observed in Figure 1 below where the share prices of both of the agricultural corporations started to go down once the average temperature started to exceed 23˚C in Mid-July 2018.
This effect is especially visible in the extremely warm days of the second last week of July, when temperatures hit a high of 28˚Celsius and the average share price of the basket hit the second low in 3 months of 14.17, to be followed with the yearly lowest on the 2nd of August of 14.02. Even though average temperatures are starting to get normalized, the confidence in earnings potential will take a bit longer to mature.
Figure 1: Stock prices of the basket average (For Farmers NV, Amsterdam Commodities NV, Wessanen NV) and average daily temperature in Amsterdam.
The claim above is not only true for the upper extreme temperatures. When compared to the average daily share price of the two commodities above since end of May 2016 which is 15.45 the average share price in extremely cold days is 15.25. Frozen ground and colder temperatures can affect planting, which has a direct impact on the commodity production and subsequently on investors’ confidence about performance in the agricultural sector.
This report looked at the possible impact that extreme weather has on share prices of a basket of agricultural corporations in the Netherlands. The link between the two can be approached through the lens of current and future low crop production which in turn affects corporations profit and sales. It becomes clear that July’s high temperatures and the lower share prices raise concerns about agricultural production in the Netherlands.
Download the full report: Extreme Weather Isn’t Small Potatoes for Agricultural Companies