In recent years, consumers have seen food prices around the world soar. Geopolitical unrest, supply chain issues, and rising energy costs have been among the numerous issues driving food inflation to unprecedented levels. Despite food prices in the UK seeing a month-on-month fall for the first time in two years in September, this disruption is far from over.
On top of these aforementioned problems plaguing the food industry, the world has recently entered a period of El Niño. The climate phenomenon affects global temperatures and precipitation, which in turn has a major effect on crop growth, quality, and yield, as well as supply chain. This can have a major impact on food prices.
El Niño is typically associated with bringing increased rainfall to regions such as Latin America, the southern US and Mexico. On the other hand, it can lead to lower levels of rainfall and droughts in other regions, including Australia, Indonesia, parts of southern Asia, and West and Central Africa. Episodes of the weather event typically last 9 to 12 months, although in some cases, they can persist for years.
Nidhi Jain, Commodity Specialist at The Smart Cube, comments on how the weather phenomenon is set to impact food production and prices across the globe in late 2023 and early 2024:
“The shifts in rainfall and temperature caused by El Niño are expected to have a major impact on the global supply of essential food commodities in the coming months, including grains, vegetable oil, and sugar, thus exerting an upwards pressure on food prices.
“Historically, global vegetable oil output has declined during periods of El Niño – and this is unlikely to be any different during this year’s weather event. Slow production of palm oil in key producing nations in southeast Asia, coupled with a likely fall in US soybean output and increased demand for vegetable oils from China, is set to drive up prices. As such, palm oil prices are set to increase by 8 per cent, with the cost of soybean oil rising by 6 per cent for the marketing year 2023/24 (MY 23/24).
“Elsewhere, the intensity of the El-Niño-driven dry season is set to cause sugar production in India and Thailand – two of the top five producers of the commodity globally – to fall significantly for MY 23/24. It’s very unlikely that most countries have the necessary levels of carry-over stocks to manage this issue. In turn, declining sugar production is expected to lead to the commodity’s price rising by 11 per cent across MY 23/24.
“For cocoa, output is also likely to fall as we head into 2024. El Niño will cause lower levels of precipitation than usual in West Africa, one of the leading cocoa producing regions in the world. Combined with cocoa production in the area already declining due to the spread of diseases and logistical issues, this has seen the cost of the commodity surge in recent months, with its price likely to remain elevated in the coming months and forecasted to increase by 9 per cent across this MY.
Kumar Amit, Senior Specialist at The Smart Cube, adds:
“Nevertheless, the impact of El Niño on soft commodities is not entirely negative. In fact, in some regions, the weather event can be a boon, boosting crop yield and leading to a strong harvest. This is evident in Brazil, where wetter conditions have led to a bumper harvest of both corn and wheat. This will help to mitigate declining grain yield in countries such as Australia, caused by drier conditions as a result of El Niño. As such, wheat and corn prices are set to rise by just 1.3 per cent and 0.5 per cent respectively.
“Although there have been signs that food prices are beginning to fall, the drop in the output of vegetable oils, sugar and other soft commodities is likely to cause the current trend of high food inflation to continue throughout the remaining months of 2023 and into 2024.”