El Niño Returns: Impact on global weather and agricultural markets

El Niño Returns: Impact on global weather and agricultural marketsBY ALVARO CORONA

18 July 2023
Posted by: Competere
Categories: highlights, News, Sustainable Nutrition

The agricultural industry is always susceptible to price volatility, but it looks towards technology to minimize volatility and manage the risks in the industry. The recent establishment of El Niño weather patterns forces us to consider the effects this will bring on our agricultural production and prices.

MARKET VOLATILITY

After an increase of 0.5 degrees Celsius in the average temperature of the eastern and central equatorial regions of the Pacific Ocean over the past three months, the World Meteorological Organization (WMO) has established El Niño conditions for the first time in 7 years. This means that in the coming months to a year, we can expect unusually high seawater temperatures and extreme weather events such as heavy rainfall, heatwaves, tropical cyclones, severe drought, and floods. The WMO predicts with 98% certainty that a year between 2023 to 2027 will break the record high temperatures set in 2016, the last El Niño occurrence. The extreme weather conditions accompanied by El Niño will lead to several disruptions in agricultural production. This expectation has led to anticipated reduction in yields which has created a “weather speculation window” in the future crop market. Soy, sugar, palm oil, rice and rapeseed are bound to experience some price volatility due to the global effects El Niño will bring.

FORECASTING EL NINO’S WRATH

Based on historical patterns, we can anticipate El Niño to bring drought conditions to Southeast Asia, South Asia, Northern Australia, and Central America. Southeast Asian nations, Malaysia and Indonesia account for 80% of global palm oil production but given the historical trends of El Niño, we can expect a decrease in yield. In previous occurrences, South Asian nations, India and Thailand, have witnessed a 5-10% decrease in sugar production due to this climate phenomenon. Similarly, Australia has experienced a decline in rapeseed yield during the same phenomenon. These are effects from El Niño that we can anticipate as we have witnessed them in previous years, but currently there is a drought in the US Midwest affecting the production of soybean. As a result, the Chicago Mercantile Exchange has reflected a significant price increase in soybean, soybean oil, and soybean meal. As evidenced by the recent performance of a soybean contract in the US, soybeans have reached a new peak, reaching a 20% increase since June. Palm oil estates in Malaysia have already begun to experience water stress, inducing a reduction in yields. This is a mere glimpse into the affects in the agricultural economy as Malaysia forecasts the peak of the El Niño weather pattern at the beginning of 2024. Southeast Asian nations will be faced with an increased risk of cross border haze as a result of prolonged heat and dry weather which calls for an increase control of fires.

MITIGATING RISKS

Although we cannot know for certain the associated risks and price volatility of this year’s El Niño weather pattern, we use tools such as weather indices to prepare. Introduced last year, the “Central Meteorological Observatory-Dashing Exchange Temperature Index”, quantifies the cumulative influence of temperature on crop quality and yield. This index has become a crucial tool for agricultural decision-making, offering valuable insights and serving as a key indicator. Governmental agencies rely on this index to formulate appropriate policies, while producers utilize it to develop production and management plans aligned with the index’s forecast. By doing so, the index not only facilitates informed decision-making but also enhances risk management and mitigates price volatility in the agricultural sector. Its utilization enables stakeholders to proactively respond to market fluctuations, adjust production strategies, and make well-informed decisions that contribute to a more stable and resilient agricultural industry.

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