El Niño declared by U.S. scientists: which countries and commodities will be most affected?

El Niño arrives:

On 8 June, scientists at the U.S. weather service declared the emergence of El Niño, a weather pattern which causes warmer-than-average sea temperatures in the central and eastern Pacific. Depending on its strength, El Niño can have significant impacts on the climate of areas even further afield. An article published in the journal Science in May found that the most severe El Niño event in recent history, in 1997 and 1998, caused USD 5.7 trillion of damages, stoking global inflation and significantly hitting global economic growth. All depends on the strength of this year’s El Niño; the U.S. weather service estimates that there is an 84% probability of a “greater than moderate strength” El Niño and a 56% chance of a “strong” El Niño.

The hardest-hit countries:

El Niño poses the greatest economic risk to countries in the tropics and Southern Hemisphere. In India, for example, El Niño tends to cause below-average rains during the monsoon. This could hurt rice and corn yields, hitting agricultural output and stoking inflation in the process. In Argentina, on the other side of the Pacific, El Niño tends to cause above-average rains. If this causes flooding, it could destroy crops, raising prices and hurting GDP growth. In 2015–2016, El Niño caused the worst flooding in 50 years in South America, forcing over a hundred thousand people to evacuate. That said, if the increase in rainfall is moderate, El Niño could boost GDP growth in Argentina and neighboring countries as the region has recently been afflicted by drought.

The hardest-hit commodities:

In the past, El Niño has hit the supply of commodities and thus raised their price. This is also expected to be the case this year. The supply of agricultural commodities such as palm oil, sugar, wheat, cocoa and rice, and metals such as copper is likely to be hardest hit. Commodity prices can also be further stoked on the demand side, as higher temperatures stemming from El Niño raise demand for cooling, straining power grids and raising fuel consumption. That said, El Niño can also be a bearish factor for certain commodities. Higher rainfall in drought-affected areas would boost agricultural output, while lower rainfall in oil-, gas- and coal-producing areas like eastern Australia and the Gulf of Mexico would boost energy output.

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Insights From Our Analyst Network

On the outlook, EIU analysts signaled the risks to India:

“EIU believes that there is a very high risk of an acute El Niño event causing severe economic disruptions to Asia in 2023. The effects across the region will vary widely, with South and South‑east Asia more exposed […]. Our 2023 real GDP growth forecast for India […] already considered a ‘mild’ El Niño. However, a more severe El Niño could prompt no more than a 0.6-percentage-point downward revision in the forecast.

Analysts at Fitch Solutions said:

“For some countries, including major agricultural parts of Latin America (including Argentina, Uruguay, and the south of Brazil), the transition to El Niño typically brings increased rainfall, bringing much-needed relief to these regions that are still facing worse-than-normal soil moisture […]. However, while we expect agricultural output, particularly soybean output, in some areas to receive a boost from El Niño, for many of the world’s major agricultural powerhouses, the transition to El Niño is likely to bring challenging climatic conditions, which will likely weigh on global wheat output.”

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