When El Nino returns

In recent weeks, meteorological agencies in Japan, Australia and the United States have all voiced concerns that this year’s El Nino will not go away quickly, as was the case in 2014.

 

All three agencies fear El Nino will last longer and intensify during the second half of the year and probably well into 2016.

 

Just how severe it will be remains to be seen.

 

El Nino occurs when warm water moves from the western (around Indonesia) to the eastern (around Peru) equatorial Pacific Ocean, in conjunction with a change in prevailing trade winds.

 

It is a natural phenomenon that occurs irregularly every two to seven years and can last from nine months to a few years.

 

El Nino episodes cause deviations in normal ocean sea surface temperatures, resulting in a significant effect on global weather systems as heat transfers from the oceans into the atmosphere.

 

The movement of warm ocean water to the eastern Pacific Ocean affects temperatures and rainfall patterns. These in turn cause droughts, storms, forest fires and floods, depending on the location.

 

The west coast of the Americas, for example, experiences more rain, while Indonesia and Australia battle severe drought. The broader impacts are global and can have much wider effects.

 

The last major El Nino (1997-1998) led to 23,000 deaths and caused economic damage globally totalling around $35 billion, according to the US-based National Oceanic and Atmospheric Administration.

 

The problem facing Asian governments and economic planners is trying to estimate what this weather phenomenon will mean for food prices and inflation.

 

Joseph Incalcaterra, an economist with HSBC in Hong Kong, said in a note that the risks from El Nino should not be “underestimated”, and that the latest updates from the world’s principal meteorological agencies have made clear that there are no signs of El Nino conditions subsiding, as was the case last summer.

 

“To the contrary, the language implies that El Nino conditions will last longer and possibly intensify,” Incalcaterra said.

 

Graeme Hammer, professor of crop science at the University of Queensland in Brisbane, says the latest modeling showed El Nino will have a “significant impact” on wheat yields in Australia, the world’s fifth-largest producer of the crop.

 

“It’s not looking great,” he says.

 

According to the Australian Bureau of Agricultural and Resource Economics and Sciences, Australia’s wheat harvest for 2015-16 could be cut by more than 1 million tons.

 

“It’s really difficult to predict the effect of an El Nino this early,” Peter Collins, manager for agricultural commodities at the bureau, told Bloomberg.

 

The Food and Agriculture Organization of the United Nations predicts El Nino could cut global wheat output by 1.4 per cent.

 

Gundy Cahyadi, an economist with DBS Bank in Singapore, says the most immediate impact of El Nino will be felt in agriculture, but the full impact will be felt “through the inflation channel”.

 

Food makes up 30 to 40 per cent of the consumer price index basket in countries like Thailand, the Philippines and Indonesia, Cahyadi tells China Daily Asia Weekly.

 

“Higher food prices will clearly put upward pressure on inflation,” he says. “Of the three countries we (DBS) cover - Thailand, the Philippines and Indonesia - we are probably more worried about Indonesia at this juncture, given that inflationary expectations there have been relatively higher.

 

“The weak rupiah has also been a factor,” he adds.

 

“When you look at the economy, with signs of moderation in domestic demand, the last thing the economy needs is prices shooting up in 2016.”

 

While DBS has not factored in the impact of El Nino in its forecasts, he adds, going forward “we are monitoring developments”.

 

Mark Walton, a Hong Kong-based economist with French bank BNP Paribas, says anything that pushes food prices materially higher in Asia “has the potential to be a headache for central banks”.

 

A study by the International Monetary Fund has found El Nino adds between 0.5 and 0.9 per centage points to inflation in India, Indonesia and Thailand. Food prices in these countries make up 48 per cent, 33 per cent and 34 per cent of their respective inflation baskets.

 

But Rajiv Biswas, chief economist with IHS, is less pessimistic. He says fears about the impact of El Nino on Asian agricultural production have eased due to better-than-expected rainfall, especially in India, where monsoon rains in June were better than forecast.

 

“It is hard to predict the full impact of El Nino,” he tells China Daily Asia Weekly. “If we do get a severe El Nino later in the year, it could impact the production of key commodities such as coffee and palm oil in Southeast Asia. If that situation occurs, it could push up certain soft commodity prices. But it is still early days.”

 

In a report in June, the Food and Agriculture Organization said while international forecasters have acknowledged the arrival of El Nino, its full impact (sometime toward the end of the year) “will depend on the severity/duration of the phenomenon”.

 

Indonesia is said to be watching the development of El Nino closely, anticipating its direct impact on the country’s production of agricultural crops including rice, palm oil, coffee, corn and cassava.

 

Rice is a key commodity in Indonesia and the staple food of nearly all households. A solid rice output is important to combat poverty.

 

However, the nation’s production can barely meet domestic demand, even in optimal climate conditions, says the website Indonesia Investments.

 

The US Department of Agriculture predicts Indonesia needs to import at least 1.5 million tons of rice in 2015 as there are no other short-term solutions. However, due to the weak rupiah, this may bring imported inflation.

 

The Association of Indonesian Coffee Exporters and Producers (AEKI) estimates that Indonesian coffee output will be between 600,000 and 650,000 tons this year, lower than the institution’s earlier forecast of 650,000 to 700,000 tons, and below production realization last year of 711,513 tons.

 

Other analysts and industry groups expect the El Nino phenomenon will reduce AEKI’s forecast by about 50,000 tons.

 

Indonesia is the world’s third-largest producer of the robusta species of coffee bean, which, according to a report from HSBC, is highly vulnerable to a lack of rainfall.

 

In Vietnam, the world’s largest robusta bean grower, dry weather has already triggered concerns about coffee output as more hot spells are expected.

 

Starbucks said in a written reply that it was closely monitoring coffee production in the region, but it would be difficult to evaluate the impact of El Nino at this point. According to logistics provider Damco, Vietnam and Indonesia are important sources for Starbucks.

 

The Philippines has placed eight provinces under a state of calamity due to a drought caused by El Nino. Farmers say 40 per cent of their crops have been affected by the drought, and could lessen their crop production for the rest of the year.

 

Meteorologists say more than 50 of the 81 provinces in the Philippines were beginning to suffer from the effects of the El Nino phenomenon.

 

Chua Hak Bin, an economist with the Bank of America Merrill Lynch, cautioned that Asian central banks faced “risks and uncertainty” from the El Nino phenomenon, with “potential severe weather shocks on growth”.

 

In the three quarters following an El Nino occurance, inflation tends to spike 1 per cent in Indonesia, 0.6 per cent in India and 0.5 per cent in Thailand, Chua told CNBC.

 

“That may narrow the room for easing monetary policy and cutting interest rates,” he said.