5 Things to Watch for With El Niño in Asia

U.S., Australian and Japanese government weather forecasters have declared that the El Niño phenomenon is back for the first time in five years. With its return have come expectations of declining food crop yields and heightened food price volatility.

#1: Palm Oil

With 90% of global palm oil production coming from Indonesia and Malaysia, dry weather in those countries this summer could push up prices. However, palm oil crops are reasonably resilient to drought conditions and yields may not be heavily impacted unless the dry conditions continue through to 2016 . Large global soybean inventories should limit the extent of any price rises as soy oil can be substituted for palm oil, according to Capital Economics.

#2: Coffee

If drier-than-normal conditions continue in Indonesia and southern Vietnam, this could hit the availability of Robusta coffee – used primarily in instant coffee and espresso. Robusta coffee is highly susceptible to a lack of rain, so dry weather could hit yields quite quickly. On the flip side, El Niño could bring warmer weather to coffee-growing areas in South America, where Arabica crops are generally grown, reducing frosts that can hit yields.

#3: Wheat

Australia’s wheat yields have already been under pressure over the last couple of years due to droughts and things aren’t looking positive this year in the country that contributes around 14% of global wheat exports. A fall in production down under could require additional wheat from the Northern Hemisphere to balance the market while also limiting the availability of high protein wheat. Yields were “slashed terribly” during previous El Niño events and they could fall by 50% this time around, says agribusiness economist Phin Ziebell at National Australia Bank. Hot, dry conditions in Canada and France and rains during harvesting in the U.S. are already putting pressure on global wheat supplies.

#4: Rice

Ample stocks across Asia should prevent steep rice price rises even if yields are hit by dry weather. India’s monsoon season has so far produced more rain than forecast, which should also alleviate concerns about rice availability.

#5: Other Commodities

El Niño doesn’t just affect water-reliant soft commodities: It can put pressure on prices for oil, coal and nickel. El Niño typically leads to higher demand for both coal and crude as less electricity is generated from both thermal power plants and hydroelectric dams, according to an International Monetary Fund working paper. Nickel output in Indonesia, the world’s top producer of the metal, could fall because many mines there rely on hydro power.