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The current El Niño weather phenomenon is expected to exacerbate the impact of India’s rice export ban and Russia’s withdrawal from the Black Sea grain deal, potentially leading to inflation in emerging markets.
Starting in September, El Niño will bring extreme heat to parts of South Asia and Central America, as well as heavy rainfall over the Andes.
This disruption in weather patterns will likely have a negative impact on global food production and prices. India has already banned exports of non-basmati white rice due to heavy rainfall, while Russia’s actions have affected Ukrainian grain terminals.
These three shocks could significantly increase household inflation expectations, particularly in poorer countries where food comprises a larger portion of consumer spending compared to developed economies.
As a result, emerging market central banks may need to keep interest rates higher for a longer period, leading to potential volatility in local equity and sovereign bond markets.
Despite these risks, investors have not fully considered the potential impact of extreme weather on commodity and financial markets. Zanna Aleksahhina, a grains analyst at commodities research group Mintec, emphasizes the importance of weather forecasts in assessing these risks.
The bans on rice exports by India and the grain deals affected by Russia are already influencing global food prices. The United Nations’ FAO food price index experienced a decline between March and June but saw a slight increase in July, particularly in vegetable oil prices. Wheat and rice prices also rose.
El Niño is also impacting other commodities, with cocoa futures reaching their highest level since 2011. The risks associated with El Niño extend beyond food and can affect cocoa, rubber, timber, and zinc prices.
Developed markets are not immune to these effects. Central American regions experiencing extreme heat due to El Niño are also facing severe droughts. In Australia, El Niño brings heavy rainfall that could disrupt the iron ore market, leading to higher prices.
Demand for liquefied natural gas could increase if El Niño causes a colder winter in Europe.
Overall, the world is facing increased risks and higher prices due to El Niño. Factors like river depths, Panama Canal transit, and reservoir stockpiles become as important as petroleum reports in monitoring the situation.
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