In July, the World Meteorological Organization officially declared the onset of El Niño conditions. This is a climate phenomenon that influences weather patterns and lifts global temperatures.
The developing El Niño contributed to average global temperatures in June and July hitting new records. The impact of El Niño events, which take place every few years, differs across crops and regions.
" As things stand, a sharp rise in the prices of rice, a staple in the region’s diet, is the key concern, particularly for the net importers – the Philippines, Malaysia and Indonesia.“
A shift in trade winds could raise the risk of droughts in some countries but improve crop yields in others. As things stand, El Niño conditions are mild, but strengthening.
El Niño typically results in drier than normal conditions in Southeast Asia and India. The associated increased risk of severe droughts could impact harvests for key crops such as rice, sugar and palm oil.
During very strong El Niño events (1997-98, 2015-16), many countries experienced declines in agricultural production, albeit to varying degrees.
The impact of El Niño on food inflation is less consistent, reflecting complex dynamics including a countries’ ability to import from the global food supply chain, whether there is government intervention to help stabilise prices and the dynamics of the oil and fertiliser markets.
Countries already experiencing lower rainfall before the onset of El Niño are at higher risk of more adverse agricultural impacts during El Niño events.
Thailand stands out as particularly vulnerable on this front, with its year-to-date precipitation well below historical ranges. Water levels are also low in major dams. Thailand’s 2023 paddy rice production is expected to be 5.6 per cent lower than 2022, according to the Minister of Commerce.
Unfavourable weather conditions in Thailand could have adverse implications for the global supply of rice and sugar, given the country’s sizeable role in those markets.
The Philippines faced water shortages in July with some provinces experiencing water service interruptions amid supply concerns. But water levels in key reservoirs have now risen materially following heavy rainfall brought by recent typhoons, with near normal rainfall predicted in August and September and below normal conditions from November to January 2024.
Indonesia reported 63 per cent of its territory entered the dry season and rainfall in the next three months is forecast to be below normal to normal in most areas. The government has indicated water supply in large reservoirs and dams is sufficient. The country is a major producer of palm oil and coffee.
Rainfall in Vietnam has been near average and well distributed in recent months and the availability of irrigation water in key rice producing areas has been adequate. Aside from rice, Vietnam is also a key producer of coffee.
Malaysia is anticipating average rainfall in most areas in coming months but expects the peak of El Niño to hit in early 2024. The Malaysian Palm Oil Board has warned El Niño conditions could cause potential output reductions of 1 million to 3 million tonnes (5 to 16 per cent year on year) next year.
India saw an above-average monsoon in July that facilitated crop planting activities. Weather officials suggested cumulative rainfall in August and September could be average.
Growing expectations for positive Indian Ocean Dipole conditions - another climate pattern - bode well for India as these could help India avert a drought, as it did during the very strong El Niño event of 1997-1998. India is a major producer of rice, wheat and sugar.
With El Niño underway, the extent to which each country is dependent on imported supplies for the affected crop can influence how it stokes inflation and trade balances.
A sharp rise in the prices of rice, a staple in the region’s diet, is the key concern, particularly for net importers – including the Philippines, Malaysia and Indonesia. Notably, prices for Thai 5 per cent white rice, an Asian benchmark, are now up 36 per cent year-to-date.
Other soft commodities such as sugar and cocoa have also seen sharp price gains in the year to date. These could have spill-over effects into broader food categories including beverages and confectionary.
To be clear, El Niño could cause adverse price effects beyond crops too. For instance, high prices for grains used for animal feed could raise meat prices.
The effectiveness and timeliness of the government's policy response can influence the severity of any economic impact.
Well-targeted policies, such as managing food reserves, implementing price stabilisation measures and providing financial support to affected farmers, can help mitigate any adverse effects of El Niño on growth and inflation.
For instance, India has imposed export restrictions on sugar and rice to cap domestic prices, while Malaysia has price controls in place for rice and has allocated RM3 billion to enhance paddy farming infrastructure.
Indonesia has been distributing rice assistance (10kg per household), while the Philippines has reactivated an inter-agency El Niño Task Force to coordinate efforts to mitigate potential adverse effects. Lower debt levels also help.
For instance, the combination of a relatively low debt ratio and stronger-than-expected revenue collection year-to-date offers Indonesian policymakers a significant buffer to act if needed.
For now, most weather models suggest the current El Niño will not match the strength of that seen in 2015-16.
But in the event of severe and prolonged droughts, intensified crop losses and food price pressures, fiscal support is arguably the most appropriate prescription to cap inflation.
Indonesia appears to be best positioned, both in terms of its fiscal buffer and political willingness to intervene – not least given the upcoming elections in February.
The threat of rising food inflation is likely to keep central banks hawkish, particularly in India and the Philippines where food inflation is either re-accelerating or still elevated.
If price pressures broaden and threaten to unhinge inflation expectations, then a resumption in rate-hiking cycles across the region cannot be ruled out, especially if local currencies come under pressure and exacerbate imported price pressures.
The Philippines faces a particularly challenging combination given its status as a net food importer and its already sizeable current account deficit.
All this means the impact of food prices on inflation across the region is set to be closely watched. A lot will depend on how they react as the El Niño evolves.
Krystal Tan is an Asia Economist with ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
04 Aug 2023
14 Jun 2023