Commodity in focus: Food inflation and the impacts of El Niño

El Niño is set to have a major impact on crop yield in 2024. Our experts explore how it will impact global food inflation – and how you can prepare for it.

In 2022 and 2023, consumers across the globe have seen food prices skyrocket. Geopolitical disruption, supply chain issues, and other challenges have driven food inflation to extremely high levels. However, that disruption is far from over.

On top of the issues organisations are already contending with, we’re now entering a period of El Niño – a climate pattern that sees unusual warming of sea surface temperatures in the eastern Pacific Ocean. It affects global temperatures and precipitation, which in turn have a major impact on crop growth, quality, and yield.

During our eighth Commodity in Focus webinar, The Smart Cube experts Kumar Amit and Nidhi Jain discussed the international impacts of El Niño and explored how it will influence food inflation around the world in late 2023 and early 2024.

As always, you can catch up on the full conversation on demand. But in the meantime, here are some key takeaways from the session.

Understanding El Niño and its supply chain impacts

Opening the webinar, Nidhi explained how El Niño is typically characterised by droughts in Australia, Asia and west Africa, while also triggering increased rainfall in North and South America.

“These shifts in rainfall can have a major impact on the global supply of essential food commodities, including soybean oil, palm oil, sugar, wheat, and more,” explained Nidhi. “And while its impacts aren’t always consistent, we should expect to see significant changes across those commodity markets in the coming months.”

The first commodities the team looked at in detail were palm oil and soybean oil.

El Niño’s impacts on vegetable oil markets

Historically, times of El Niño have generally seen a decline in vegetable oil production growth – and the period we’re heading into doesn’t appear to be any different. “Looking ahead, we expect a slowdown in production growth for palm oil, but soybean oil output is expected to rise amid higher production prospects in LATAM,” explained Nidhi.

Alone, slow production growth wouldn’t be enough to have a major impact on vegetable oil prices. However, this shift is coming at a time when the market is also being influenced by a wide range of other factors. US soybean output is likely to fall, demand for biodiesel is increasing, brent crude oil prices are rising, and demand is returning in China.

Paired with reduced production growth, these trends will drive prices up in the first half of 2024. “We forecast palm oil prices to increase by 8%, and soybean oil prices to rise by 6%,” said Nidhi.

Sugar and cocoa supply are both likely to fall – sending prices upwards

In the past, global sugar output hasn’t fluctuated too strongly during times of El Niño. But this El Niño is different. “Sugar’s stocks-to-use ratio is set to drop to a 13-year low due to declining production worldwide,” Nidhi explained. “In FY 23/24, Thailand and India’s production are both set to fall significantly, and it’s very unlikely that most countries have the carry-over stocks to manage that.”

For cocoa, output is also likely to fall as we head into 2024. El Niño will bring drier than usual weather in West Africa, where production has already been hindered due to the spread of disease and other local factors. “We expect cocoa’s stocks-to-use ratio to hit a 15-year low in 23/24, which will have a significant impact on price,” said Nidhi.

Changing farming habits and reduced production around the world have triggered so-called “sugarflation” over the last couple of years. And paired with the impacts of El Niño, prices are likely to rise even further. “Overall, we forecast sugar prices to rise by 11% across FY23/24, and cocoa prices to increase by 9%,” Nidhi explained.

A bumper harvest in Brazil will help mitigate declining grain yield elsewhere

El Niño events are irregular in terms of their impacts. In some regions it can be a boon, boosting crop yield and leading to a bumper harvest. In others, like eastern Australia, it can be devastating and force drier conditions.

In past El Niño years, we’ve seen a decline in the production of both wheat and corn. “The forecasted production fall is quite small, but supply of grains remains tight around the world,” Kumar explained. “We expect stocks-to-use rates to reach a near record low in 2024.”

However, a bumper harvest in Brazil looks set to offset that impact somewhat. “Increased supply due to a record Brazilian crop has paired with reduced demand from the feed industry to see prices fall significantly in recent years. Now, due to reduced production, we’re only expecting to see small increases in both corn and wheat prices,” he continued.

In FY23/24, wheat prices are likely to rise by 1.3%, and corn prices by 0.5%. But while those increases are relatively low, organisations will still need to keep a close eye on near and far conditions to avoid local shortages and supply issues.

El Niño will exacerbate ongoing local supply chain challenges

We can’t look at the impacts of El Niño in isolation. During the session, Kumar highlighted six other issues that are likely to amplify its disruptive impacts:

  • Logistics issues in the Mississippi river and Panama canal: A drop in water levels is creating grain movement issues between US farmers and the Gulf coast. That’s going to create an export premium on US grains.
  • Escalation of geopolitical tension: Russia continues to target Ukrainian ports and grain production. And now, rising tensions between Ukraine and Poland are also blocking ground transport. As a result, key grains will become even harder to source from Ukraine, affecting prices in Europe.
  • Worsening of drought in Argentina: Argentina is seeing the worst drought in its history. It isn’t just reducing current crop yield – it’s now changing how widely farmers are sowing grain. If the country doesn’t see good rainfall soon, its agricultural landscape could transform, as farmers shift to sowing new crops.
  • Quality deterioration: Increased rainfall isn’t always good for crops. If high rainfall comes ahead of harvests in regions like Europe, it will cause a significant drop in grain quality and delay harvests.
  • Indian sugar export ban: With production restricted, India may impose an export ban of sugar, or reduce the export quota significantly, to control local supply and prices. If this ban goes through, it will have a significant impact on sugar prices in Asia and beyond.
  • Disease spread in West Africa: The ongoing spread of disease in West Africa is already reducing cocoa output from Ghana and the Ivory Coast. El Niño is set to affect that even further, causing a significant supply drop.

What you can do to mitigate El Niño’s impacts

Closing out the session, Kumar shared a handful of practical tips to help procurement leaders and category managers prepare for El Niño and mitigate its forecasted disruptive impacts:

  • Plan early and explore alternative commodities to ensure business continuity.
  • Don’t be too reliant on a single provider or region and be very careful when purchasing from regions where prediction is set to decline.
  • Increase inventory now to mitigate the impacts of shortage and protect your business against it.
  • Monitor disease outbreaks and weather conditions as they evolve, and keep a close eye on how their impacts are spreading and developing – then adjust your supplier portfolios accordingly.

That’s just a small summary of the insights shared during our webinar. To discover more, the full webinar is now available to watch on demand.

And if you’d like to explore some of the market forces we’ve discussed here in more detail, talk to us and find out how The Smart Cube can help you anticipate and mitigate production shortages and rising prices across your most critical categories.

Watch the webinar on demand