Food Prices and El Niño -- Will El Niño Develop This Year?

Guild Investment Management  |

In recent months, both Australian and U.S. meteorological officials have pointed out the possibility of an El Niño weather pattern setting up in the Pacific Ocean. As we recently noted, El Niño is a pattern which increases rainfall in certain parts of the globe and decreases it in others. Meteorologists believe that there is a 65 percent probability of El Niño developing by July 2014.

Historically, El Niño has had big effects on commodity prices -- primarily nickel, copper, and food prices. Nickel has already risen, because even before an El Niño event, Indonesia has curtailed shipments from its mines. Indonesia is the world’s largest producer, and much of its production is created using hydropower -- so an event could send nickel prices higher. As readers know, nickel is an important component of steel production. On the other hand, copper production could be impeded by an excess of rain in Chile’s mountains, making copper mining and transportation more difficult.

El Niño usually increases rains in California, eastern China, and the U.S. sunbelt, and decreases rains in India, northern Brazil, Indonesia and Australia.

Food prices are less likely to be impacted by El Nino in 2014, with the exception of coffee, cocoa and sugar. The country which is most vulnerable to an El Niño event that affects its monsoon is India -- a country very dependent upon subsistence agricultural and extremely dependent upon its monsoon rains. If these were to be affected, India could suffer from food inflation and possible shortages.

Outside of India, much of Asia has a strong surplus of rice and other food grains and is less likely to be immediately affected. Drought-impacted Brazilian coffee farmers would get more rain if an El Niño developed, but they need rain today, and the rains would not occur until harvest season in July and August -- and thus would slow and deplete coffee production for 2014. African cocoa producers could be affected, as could Brazilian sugar producers. Currently, we are watching developments and will act if El Niño starts to develop. 


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