El Niño is the next threat to commodity supply

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BRAZIL WAS which was once a small exporter of maize. Within the last two decades, however, its share of global exports is expected to account for more than 30% this year. Similar success stories can be found throughout Latin America, which is responsible for a growing share of the world’s agricultural output. This year’s harvest has been particularly productive, and helped make up for the lack of crops from Ukraine during the war. But the next harvest may not be much more plentiful.

In June the climate phenomenon called ENSO, an interaction of winds and currents in the Pacific Ocean that has global effects, into its El Niño phase. El Niños such as those that have just begun will bring warmer temperatures around the world and produce distinct regional weather anomalies around the tropics. Extremes associated with El Niños in the past have damaged agriculture and other industries that are vulnerable to changes in weather patterns. The impact on commodity powerhouses like those in Latin America could spell trouble for the global food supply.

Analysts at EIU, our sister company, thinks that El Niño will bring three major changes that will affect the area’s production (see the map). Some areas will be drier than normal; others wetter; while others resist high temperatures. An unlucky few will get a combination of all three: Bolivia could face drought and floods across the country.

The Caribbean, Central America, Colombia and western Mexico will be especially vulnerable to drought. Drier weather towards the end of this year will hamper agricultural production and increase the risk of forest fires. Staple grains, beans and stock – all highly dependent on water – are most affected.

At the same time, wetter conditions could bring some relief to parched areas in Latin America. Argentina’s fertile Pampas region, for example, could benefit from above-average rainfall. A severe drought has destroyed his agriculture, which accounts for 6% of the country’s population GDP according to the World Bank. Soybeans, corn and wheat – three crops that grow particularly poorly in dry conditions – could benefit from El Niño rain.

Too much of a good thing, however, increases the risk of flooding. The EIU predicts that Peru’s economy will be hit between January and May next year, when heavy rains on the northern coast could damage infrastructure and reduce agricultural and fishing output. Flooding has already destroyed irrigation canals and could bring locusts, rats and plant diseases to farm areas. El Niño events in the past have had a significant impact on prices: in March 2017 consumer prices in Peru rose 1.3%, month on month – the biggest jump in 19 years.

Changes in temperature bring more challenges. Dry crop weather is expected for Brazil’s central-western region, the country’s agricultural powerhouse. The north and northeast – important producers of cotton, maize and sugarcane – may experience drought. But southeast Brazil tends to benefit from plenty of rain in the spring and summer of an El Niño year, which boosts agricultural production.

For now, global prices for most major crops are still below pre-war levels, despite a jump in wheat prices after Russia bombed Ukraine’s Black Sea ports. A good harvest across much of the world has kept supplies flowing and prices down. A return of El Niño could cost that.■

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