El Nino Seen by Citigroup Posing Risks for Global Economy

Updated on

El Nino poses a risk for the global economy in the second half because the event may hurt crops and boost world food inflation, according to Citigroup Inc.

The weather pattern, which can cause droughts in Asia and wetter summers in North America, may increase returns from grains by as much as 25 percent and lead to higher retail food prices, the bank said in a report dated June 16 and based on El Nino cycles and commodity returns going back to 1970.

Australia last month declared the El Nino, the first since 2010, and says it shows signs reminiscent of the most severe event in 1997-1998. The U.S. predicts the pattern may last through January and beyond, while India expects it to crimp this year’s monsoon, hurting food output. HSBC Holdings Plc says Indonesia could boost rice imports to build inventories.

“The El Nino effect is a major tail risk for the global economy,” analysts including Aakash Doshi and Ed Morse wrote. “Momentum is building about the potential disruption to commodity supplies ahead, especially staple food crops.”

While every event is different, El Nino has been known to push storms across the southern U.S. during winter months, favoring rain for California, and cut the number of hurricanes that form in the Atlantic. The broad extent of warmth across the tropical Pacific is unusual and has not been seen since 1997-1998, according to Australia’s Bureau of Meteorology.

Food Costs

The pattern is developing as food prices measured by the United Nations are the lowest in more than five years because of increasing global supplies. The cost of rice, the staple for half the world, is near the lowest in more than eight years and soybeans are trading near their cheapest since 2010.

Grains returns rise as much as 10 percent to 25 percent during El Nino cycles, the analysts said. For energy, while the event typically brings milder weather to the U.S. and Japan, cutting demand for liquefied natural gas in power generation, it can reduce hydropower, boosting demand for diesel and LNG.

The bank doesn’t expect any dramatic El Nino effect on industrial metals and no price impact on precious metals. There is no discernible bias from the event for coffee or cocoa prices, the analysts wrote.

In India, forecasts for a weak monsoon after a heatwave in parts of country should serve as warning to policy makers, HSBC wrote in a report on Tuesday. While the country has robust grain stockpiles, weak rains will have a tangible impact on food inflation, according to analyst Joseph Incalcaterra.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE