Monday, November 2, 2015

El Niño And Agricultural Commodity Prices

The current episode of El Niño could be the strongest since
1950, but it is unlikely to lead to global grain price rises,
according to the World Bank.
World Bank (October 2015) - El Niño often adversely affects agricultural production in the Southern Hemisphere, especially countries in Latin America and East Asia, as well Australia. Recent weather forecasts suggests that the current El Niño episode could be one of the strongest on record. However, its impact on commodity prices is likely to be predominantly local rather than global because global markets are currently well-supplied; country-specific factors could have a significant impact on local prices.

The impact of El Niño is highly heterogeneous across regions and commodities, depending on the timing, duration, intensity, and weather patterns prior to its occurrence. Particularly, it impacts agricultural commodities by affecting yields—lowering them for most but raising them for others—and industrial commodities by affecting operations and infrastructure. It is useful to briefly analyze recent weather forecasts for areas affected by El Niño and review main agricultural commodities produced in those areas.

Central and South America: Dry conditions are expected to persist across Central America and parts of South America while wetter than normal conditions are projected in Brazil and north-east Argentina—a key production region for coffee, soybeans, and some grains.
Australia: As of September, rainfall in most part of Australia had been below average. Australia is the world’s fifth larger wheat exporter.
East Asia: Drier than normal conditions that developed in the summer are expected to continue, especially in Indonesia, the Philippines, Thailand, and Vietnam. In Indonesia, recent projections show a decline of 1 to 2 million tons of rice, equivalent to 1.5 to 3 percent of the country’s rice output. In addition to rice, the region is a key supplier of palm oil and natural rubber.
Central Asia: El Niño is likely to intensify snow accumulation in the mountainous areas of Central Asia, thus improving irrigation conditions for the summer of 2016 in a number of countries, including Afghanistan, Iran, Tajikistan, and Uzbekistan (the world’s fourth largest cotton exporter).
South Asia: So far, growing conditions in South Asia have not been affected by El Niño in a major way. This is significant for India because agriculture, which is mainly rain-fed and thus subjected to weather fluctuations, accounts for 17 percent of its GDP.
Southern Africa: Drier than normal conditions are also developing in Southern Africa, but the region is not a key player in any global commodity market.
North America: Warmer than average temperatures across Canada and the northern U.S. may hamper grain yields, but wetter-than-average conditions across the rest of the U.S. could boost soybean yields.  

Thus far, both global and domestic prices of key grains have not experienced a major spike, even in countries at risk from El Niño, regardless of the period examined. For example, in a sample of 22 countries, the median price of maize increased only 2.1 percent from the first to the second quarter of 2015; the median prices of wheat and rice changed very little over that period. In global markets, the world price of maize, wheat, and rice declined by 3, 9.5, and 7.5 percent over the same period, respectively. A comparison of the second quarter of 2015 to the corresponding quarter of 2014, confirms small changes in  domestic prices for the same sample of countries as well. 

El Niño is likely to have a greater impact in more isolated local food markets that are not linked to international markets — a common characteristic of some local food markets in the developing world. Weather disturbances tend to have a robust short-run impact on local prices in a significant number of maize markets in developing countries. In contrast, a rather small share of maize markets is influenced by global prices in the short-run.