Will the drought caused by El Niño in southern Africa, although it has abated, affect global food trade?

Severe drought triggered by El Niño across large swaths of southern Africa is sending ripples through global food trade.

Affected by the El Niño phenomenon, many countries in southern Africa have suffered severe drought, and food production has been greatly impacted, and Zimbabwe, Malawi, Zambia and other countries have declared a state of emergency or disaster.

Currently, these countries are turning to other producing countries to fill the gap. For example, corn production could plummet by about 60 percent in Zimbabwe, which is considering importing corn from Brazil for the first time in a decade.

According to Xinhua News Agency, Zimbabwean President Emmerson Mnangagwa recently said that the current season's summer grain output is expected to be about 868,000 tons, and the national grain gap is nearly 680,000 tons, which needs to be made up by imports.

According to the judgment of the World Meteorological Organization (WMO), El Niño is gradually weakening, but it will continue to affect the global climate in the coming months. Temperatures are expected to be above normal in almost all land areas between March and May.

Kiran Ahmed, a senior economist at Oxford Economics, told CBN reporters that its baseline forecast is that world food commodity prices will generally decline this year, thereby further reducing the pressure on downstream food retail prices.

"However, we believe that the risks to this forecast are overwhelmingly skewed to the upside. He also explained that adverse weather conditions, if persistent, could reduce harvest prospects in Europe, and that disease could reduce the Argentine corn harvest, while early signs of sowing in the United States would suggest a reduced harvest. Persistently high domestic rice prices in India may also prompt further export restrictions. At the same time, energy price forecasts (key input costs) are also facing upside risks.

El Niño causes drought in southern Africa

Earlier, Zimbabwean President Emmerson Mnangagwa announced on April 3 that the drought triggered by the El Niño phenomenon threatened the country's food security and the country entered a state of disaster.

In his State of the Union address on the same day, Mnangagwa said that due to the El Niño phenomenon, more than 80% of Zimbabwe has received below-normal rainfall, and the current output of the 2023-2024 agricultural season is not satisfactory.

He said it was crucial to ensure a winter wheat harvest in the face of a shortage of corn harvests, a staple staple grain. "Our priority is to ensure food security for all Zimbabweans. ”

Elsewhere in southern Africa, Zambia is in talks with Tanzania and Uganda on imports. South Africa may need to import large quantities of white corn for the first time since 2017.

White corn is a staple food in southern Africa, while yellow corn is used for animal feed. Yellow corn is readily available internationally, but white corn is different.

Davis, chief investment officer at Farrer Capital, an agriculture-focused hedge fund, said: "There is not necessarily a readily available supply of white corn. ”

Mexico has been a major supplier of white corn, but the country is also suffering from a drought that makes it difficult to get enough white corn from the U.S. quickly, he explained. This effect has also exacerbated the disconnect between markets. For example, South African white corn futures are up more than 40% this year, while U.S. yellow corn is down about 6%.

"We are seeing the effects of climate change in our daily lives," Davis said. ”

El Niño has abated, but it is still having an impact

WMO statistics show that the 2023-2024 El Niño peaked as one of the five strongest on record.

Its forecasts show a 60% chance that El Niño will persist between March and May, and an 80% chance of a neutral condition (neither El Niño nor La Niña) between April and June. La Niña could form later this year, but it's uncertain at this time.

Typically, El Niño occurs on average every two to seven years and lasts for 9 to 12 months. This is a naturally occurring climate pattern that causes sea levels to warm in the central and eastern tropical Pacific Ocean. It affects weather and storm patterns in different parts of the world.

"Every month since June 2023 has seen new record temperatures – 2023 is the warmest year on record so far," said WMO Secretary-General Professor Sauro. El Niño has contributed to the creation of these record temperatures, but endothermic greenhouse gases are undoubtedly to blame. ”

"Sea surface temperatures in the equatorial Pacific Ocean are a clear reflection of El Niño. But sea surface temperatures in other parts of the world have continued to be unusually high over the past 10 months. Sea surface temperatures in January 2024 are the highest on record so far. This situation is worrying and cannot be explained by El Niño alone. Professor Sauro said.

According to WMO data, the El Niño phenomenon is persisting, albeit somewhat abating, and sea surface temperatures are expected to be higher than normal in most of the world's oceans, which will lead to above-normal temperatures over almost all land areas over the next three months and affect regional rainfall patterns.

As can be seen, this El Niño has led to increased rainfall, triggering flooding in the Horn of Africa and southern the United States, resulting in unusually dry and warm temperatures in Southeast Asia, Australia and southern Africa. El Niño exacerbated the drought in northern South America and also led to drier and warmer parts of southern Africa.

With El Niño and climate change affecting the output of many bulk producing regions, how to assess global food trade and the risks involved in 2024?

Ahmad explained that since demand for food commodities is largely driven by fairly stable factors such as population, and because food is a necessity and demand is quite inelastic, price movements are overwhelmingly driven by the supply side.

Thus, the main reason for the decline in food commodity prices is the more adequate availability of many important crops. He said the three main crops – wheat, rice and maize – account for more than half of global caloric intake. This means that where their prices are headed is critical to understanding the ultimate pressure on consumer food budgets around the world, especially in developing markets where these staple foods make up a large proportion of the diet and are less food processed. For now, both global wheat and corn harvests are expected in 2023/24.

World food prices, as measured by the World Bank's Food Price Index, have been declining quarter-by-quarter since the third quarter of 2022, falling by 9.2 percent in 2023, Ahmed said. "We expect prices to fall by a further 5.6% this year before picking up throughout next year. ”

However, he also cautioned that there is a clear upside in terms of price risks at the moment.

For example, one of the main risks to wheat is the weather. "In Europe, heavy rains have caused farmers to delay planting, affecting the quality of wheat, which could lead to a more significant increase in prices. If the harvest disappoints, the fact that stock utilization is at its lowest level in nine years will only increase this upside risk. He explained.

In the case of maize, for example, there are growing concerns about reports of disease damage to Argentine crops. Argentina is the world's second-largest exporter after the United States, he explained.

"So, while our base case is that food prices will remain subdued this year, the risk that prices may rebound more than expected is increasing. Ahmed said this could keep food price inflation higher than our base case, maintaining pressure on consumers.

(This article is from Yicai)