What a Super El Niño Means for Food Inflation Over the Next Six Months
A strong super El Niño is underway, and the potential crop damage that would push food prices higher has not yet arrived. El Niño feeds into food inflation by cutting the planted area and the yields of staple crops, and weather specialists place the heaviest of that effect between September and December, which means the transmission from weather to food price is still in front of the market rather than behind it. Consecutive heatwaves have already run through the European Union, Ukraine and Russia, yet those are the opening moves rather than the main event. The gap between a weather event that is confirmed and a supply effect that is not is what separates current wheat and vegetable oil supply from the tighter picture the Food and Agriculture Organization has warned about.
Bertrand Oesterle is Vice President of Clearing and Execution Sales at StoneX in London, where his coverage runs across commodity markets from grains and oilseeds through to other listed products, which is the ground where a weather event in Asia becomes a supply and pricing question for European buyers.
Key Themes from the Discussion
A strong super El Niño has started, with its main crop impact expected between September and December.
India is expected to plant a lower wheat area, and Malaysian and Indonesian palm oil production faces heat risk.
The Food and Agriculture Organization sees El Niño feeding into food inflation over the next three to six months.
El Niño Concentrates Its Crop Risk Between September and December
"People are saying it's not just that, it's much more to come". That is Oesterle on the distance between the heat already visible across Europe and the Black Sea and the crop effect still ahead of the market. El Niño has started and is characterized as a strong super El Niño, with weather specialists placing its real impact from September through December. Oesterle is specific about where that shows up, saying "when we look more specifically, it will be about India, for example, which is expected to have a lower wheat area", while Malaysia and Indonesia face lower palm oil production if heat reduces the crop. Consequently, commercial buyers are working with a weather event that is confirmed and a supply shortfall that is not.
Wheat and Palm Oil Supply Carry El Niño Into Food Prices
Food inflation risk from El Niño travels through staple crop supply rather than through any single market. India's expected reduction in wheat area sits at the front of that chain alongside the threat to Malaysian and Indonesian palm oil output, because wheat and vegetable oils are the categories where a production shortfall reaches household food prices fastest. Before any of it is confirmed, it is "that element of uncertainty which is creating a potential for further bullishness" across grains and oilseeds, according to Oesterle. In practice that leaves buyers facing a market attaching a risk premium ahead of the physical evidence. Oesterle points to the FAO as the most alarmed voice on El Niño, "saying that it is likely to reduce crops worldwide and it could feed over the next 3 to 6 months into food inflation".
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