Climate Shifts to Shake Global Commodity Markets

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Extreme weather events are reshaping commodity markets as insurers, investors, and governments adjust to financial realities. According to the United States National Centers for Environmental Information, the United States saw five billion-dollar disaster events in the year 2000, but that number jumped to 27 in 2024. The five-year average cost of natural disasters in the country has risen from $23.8 billion at the start of the century to $149.3 billion in 2024.

Statistics Canada recently found that Canadian home and mortgage insurance premiums increased by 45 percent over the past six years, attributing much of the cost to extreme weather events. In 2024 alone, catastrophic claims hit a record $8.6 billion in Canada. These rising costs influence the broader economy, but the direct impact on commodity trading is often just as significant.

Tim Pickering, founder and CIO of Auspice Capital Advisors, notes that agriculture has often been overlooked in major market shifts. He identified grain as one of three core sectors likely to see major changes this year. “When I look at the supply and demand factors, they haven’t really improved. Logistics are a huge problem. Arable land is actually arguably deteriorating because of weather phenomenon. And what it does is it puts more pressure on concentrated producing areas,” Pickering says.

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While grain prices began to rise in the first quarter as predicted, the US-Israeli war with Iran and the closure of the Strait of Hormuz shifted capital toward hydrocarbons. This shift, Pickering explains, illustrates the Cantillon effect: the idea that new money preferences certain assets over others. The focus on energy markets widened the neglect of agricultural commodities. This dynamic was compounded by Russian grain hitting global markets as the country sought agricultural revenues to finance its war with Ukraine.

Shipping challenges and soft commodities

Cracks are beginning to show in grain markets due to significant weather events. Low water levels in Gatun Lake at the center of the Panama Canal have made shipping through that waterway more challenging and expensive. This has constrained key agricultural goods and agricultural inputs like fertilizers. Geopolitical tensions in the Strait of Hormuz add another layer of complexity, as Gulf states are key fertilizer producers. While initial shortages were mitigated by other sources and planting schedules, these constraints will likely persist as time passes.

Unlike grain, soft commodities with limited growing regions face greater volatility. Pickering points to coffee, cocoa, and sugar as examples. These markets are already characterized by high demand and tight supply, meaning even minor production events can trigger large price movements in futures markets. Coffee provided a recent example, with a significant price jump in July.

Managers like those at Auspice Capital operate long strategies to capture upward movements and long-short strategies to profit from outlier moves. The firm looks at a “wheel of factors” that impact commodities, with weather being just one component. The strategy relies on monitoring price and volatility spikes as signals to enter or exit positions. “How did we participate in coffee at the beginning of July? It looked pretty soft, and then all of a sudden it started to tick up, and it looked like an outlier move. We got long within a week. We were already cutting our risk because volatility had exploded,” Pickering says. “The point of all this: you have to remain nimble, available. You have to have capital ready to go and really focus on what the price is telling you as opposed to what the common narrative is.”

Investors must watch for these signals while recognizing that extreme weather events are now a persistent factor in the financial setting. The recent record costs for insurers and the sustained pressure on arable land suggest that commodity prices may continue to reflect the physical reality of a changing climate.