El Niño's Impending Impact on the Horizon

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The National Oceanic and Atmospheric Administration has identified El Niño conditions present in May, with expectations of gradual strengthening into the winter of 2023 and 2024, including a 56% probability of a strong El Niño developing. Historical patterns indicate a decline in wheat and palm oil production, while soybean output may experience growth in favorable regions such as Brazil, Argentina, and the United States. The supply shortages anticipated in cereals, grains, vegetable oils, bakery, and confectionary items are expected to drive up prices and contribute to food inflation in the fourth quarter of 2023. The effects of El Niño are not immediate, often becoming apparent 9-12 months later, suggesting a prolonged impact from the 2023 El Niño.

Specific concerns lie in the projected 2-5% decrease in global wheat production, with Australia, the United States, and Canada likely to be significantly affected. Palm oil yields are expected to decline by 3-5% in Indonesia and Malaysia due to dry weather, while West Africa may witness reduced cocoa output as a result of hot and dry conditions. Additionally, challenges related to fertilizer and pesticide availability due to sanctions on Russia may jeopardize crop quality in West Africa. Sugar production trends during El Niño years are more nuanced, with potential drops in South Asian countries but possible increased output in Brazil. However, excessive rains in Brazil may negatively impact sugar harvests. These adverse effects on soft commodities are expected to worsen the ongoing trend of high food inflation that began in 2022, with the Russia-Ukraine conflict and the aftermath of the COVID-19 pandemic. Supply shortages in 2023 and economic threats of a slowdown are likely to drive food inflation throughout the year.

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