El Niño Forecasted to Disrupt Food Logistics, Trigger Price Surges

The weather phenomenon may pose a threat of supply shortages and food inflation in 2023-2024.

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El Niño, the weather phenomenon characterized by above-normal warming of sea surface temperatures, is poised to unleash a wave of disruptions to the global food supply chain. Latin America, the southern United States and Mexico are expected to experience increased rainfall. Australia, Indonesia and parts of southern Asia, and West and Central Africa can count on severe drought. This could have far-reaching implications for food production, leading to shortages of essential commodities such as wheat, palm oil, sugar and cocoa. These disruptions are likely to contribute to sustained food inflation, affecting consumers well into 2024.

According to the National Oceanic and Atmospheric Administration, El Niño conditions were present in May and are expected to gradually strengthen into the winter of 2023 and into 2024. There is a 56% probability of strong El Niño developing in winter. A typical episode of El Niño lasts 9–12 months, but can persist for years in certain cases.

The forthcoming El Niño is projected to generate a significant rise in average temperatures, exerting a detrimental impact on crop development and yields. Analysts have examined historical El Niño patterns over the past three decades, and have observed a decline in wheat and palm oil production, while soybean output experienced growth in regions favorable for cultivation, such as Brazil, Argentina and the United States. The supply shortages, expected to affect foods like cereals, grains, vegetable oils and bakery and confectionary items will contribute to heightened prices and food inflation in Q4 2023.  Notably, the effects of this weather pattern are not immediate, with production impacts often becoming apparent 9-12 months later. This implies that the effects of the 2023 El Niño could have a prolonged impact. 

One of the primary concerns is the predicted 2-5% decrease in global wheat production. The weather's impact is expected to be significant in key wheat-growing regions such as Australia, the United States, and Canada. Australian wheat outputs are especially likely to suffer from the effects of El Niño. While excessive rain in the United States could benefit outputs, it will eventually lead to logistical challenges. In particular, the high water levels in the Mississippi River, a vital shipping route for American grains that exports around 60% of American grains from the heartland to the global market via the Gulf Coast, could disrupt export shipments further exacerbating the shortage.

The adverse effects of El Niño will also manifest in the palm oil and cocoa sectors. Dry weather conditions in Indonesia and Malaysia are projected to reduce palm oil yields by 3-5%, while West Africa, specifically Ivory Coast and Ghana, may witness a decline in cocoa output due to hot and dry conditions. Crop quality in West Africa may also be jeopardized by a lack of fertilizer and pesticides availability as continued sanctions on Russia, the largest fertilizers exporter, has limited exports. These challenges pose a significant threat to the global availability of these commodities, further worsening supply shortages and contributing to rising prices.

El Niño will not pose a threat to every commodity evenly, however. The impact on sugar production is more nuanced as global sugar output has demonstrated mixed trends during El Niño years. While South Asian countries may experience a drop in sugar production, Brazil, the largest sugar producer globally, could counterbalance this with increased output. Despite this, Brazil itself faces challenges, as excessive rains may lower sucrose content in sugarcane and cause flooding, negatively affecting sugar harvests.

The decline in soft commodity output is likely to perpetuate the ongoing trend of high food inflation that began in 2022 with the Russia-Ukraine conflict and aftermath of the COVID-19 pandemic. The anticipated supply shortages in 2023 and beyond, compounded by the economic threat of a slowdown, are expected to drive food inflation throughout the rest of the year. Drawing parallels to the period from 2006-2008, the current situation may resemble the three consecutive years of strong growth in food prices, followed by a retreat in 2009.

As the global food logistics landscape braces for the impacts of El Niño, industry stakeholders will need to navigate supply chain disruptions and prepare for heightened prices. By building resilient supply chains, exploring alternative sourcing options and investing in technology-driven solutions, it is possible to mitigate the potential repercussions on the food supply chains and ensure sustained availability and affordability of key commodities for consumers worldwide. The ability to adapt and respond effectively to the impacts of El Niño will not only help alleviate the immediate challenges but also contribute to building a more resilient and sustainable global food system for the future.