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Oana Aristide

El Niño Won’t Be Business as Usual

by Oana Aristide | Dun & Bradstreet Editor

October 6, 2015 | No Comments »

Storm clouds over field of wheat cropsWater temperatures in the Pacific Ocean suggest the current El Niño phenomenon could be one of the strongest on record, according to information from global weather-monitoring stations. El Niño, a climate pattern that starts with warmer than usual water in the western Pacific that travels eastward, could destroy lives and hurt the global economy.

Storms and floods caused by the 1997-98 El Niño (the strongest since record keeping began in 1950) caused the deaths of 21,000 people and $36 billion in damages to houses and infrastructure.

Effects of the current El Niño are already reverberating across the global economy. Commodity prices, which could suffer the most, have already been affected in some parts of the world even though the phenomenon is not expected to peak until January 2016.

El Niño weather patterns typically create wetter than usual weather in southeastern South America, western North America, and eastern Africa, as well as droughts in Southeast Asia and Australia. Cocoa, rice, coffee, palm oil, and gas are among the commodities expected to swing sharply in price as a result of the weather changes. Palm oil prices, for instance, more than doubled during the 1997-98 event.

Kenya’s second-largest export, flowers, is expected to suffer. Certain fish stocks could disappear from the waters off Peru, causing problems for fishermen who depend on the fish for their livelihood.

Due to the warmer than usual weather caused by El Niño in the eastern US, demand for heating fuel in winter is expected to be lower. Gas futures have already fallen to record lows. Poorer countries, for which food represents a large part of the consumer basket, will see inflation spike as food prices go up.

Countries affected by the El Niño drought that also rely on hydropower for a significant part of their electricity supply will experience energy shortages and outages at peak times (this will be the case, for instance, in the Philippines and Indonesia). Political risk also rises. According to Columbia University’s Earth Institute, the food shortages and extreme weather caused by El Niño double the risk of civil wars across 90 countries.

The consequences will not be universally negative, however. By reducing harvests in parts of the world such as Central America and Southeast Asia, El Niño will cause food prices to increase. But Denmark, which is a major net exporter of food whose output will not be directly affected, could benefit from this development.

In general, countries that are net exporters of food — and not in the way of the drought or floods — will gain. In an analysis of the losers and beneficiaries of the El Niño phenomenon, Japanese bank Nomura updated its Food Vulnerability Index and named New Zealand, Australia, and the Netherlands among the beneficiaries, while the losers will be mostly in the developing world: China, India, Mexico, Nigeria, Pakistan, and the Philippines.

Other beneficiaries include the east coast of the US, which will experience far fewer hurricanes, and midwestern farms, which will see more clement weather. And there is also hope that El Niño will end California’s four-year drought, but experts are at odds as to what the net impact will be. Ideally, California’s water supplies should be refilled via melting winter snow rather than rain (which dissipates quickly and doesn’t usually fall in the convenient part of the state, where the reservoirs are). But the warm weather El Niño typically brings to the state is not very compatible with snowfall.

The upshot of all of this — if the current El Niño fulfills expectations and becomes one of the strongest on record – is that its impact will be global. Some parts of the world will experience more dramatic weather than others, but even businesses that are shielded from the direct impact of El Niño will find evidence in their input costs.

Oana Aristide is a Senior Economist on D&B’s Global Data, Insight and Analytics team. Based in the UK, she covers three Scandinavian countries as well as Romania, Japan, Malaysia, and the Philippines as a contributor to D&B’s Macro Market/Country Insight Products. She has a background in central banking.

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