The current El Niño event does not seem to be triggering a strong price surge across global agricultural markets, as many key agricultural products are still being supplied in large quantities. The links between global and local markets in many countries are weak and loosely connected, and the impacts of previous El Niño events have been limited, with little market disruption.
That being said, this event might cause supply chain disruptions in individual countries or regions most affected by El Niño.
Strong Supply Continuation
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Most agricultural commodity markets continue to see strong supply, including grains and oilseeds. Stock levels are high, with many products such as corn, wheat, and rice being well above the 10-year average, and even higher than the 2006-07 season, which saw a significant price spike in global food markets. As such, in its October 2015 report, the USDA maintained a positive outlook for the 2015-16 grain and oilseed markets.
Weak Global-Local Market Linkages
The connections between global and local markets are weak, especially in smaller developing countries. It would take a truly severe El Niño event, with noticeable impacts on a major producing country of a key agricultural commodity, to cause significant price disruptions. The fundamental issue of oversupply in the global grain market has been reflected in pricing activity, but during the period from April to September 2015, when El Niño intensity was rising, grain prices actually dropped significantly. For example, compared to the same period in 2014, rice prices fell 8%, and wheat prices dropped by 32%.
The weak and loose relationship between global agricultural prices and local markets has been widely discussed in research by various authors (Baffes and Gardner 2003; Ceballos et al. 2015; Minot 2011; Heady 2011; Baffes, Kshirsagar, and Mitchell 2015). Prices in local markets are influenced by various factors specific to each country, such as weather, monetary policy, transportation costs, quality, and trade policies.
Limited Impact of Previous El Niño Events
El Niño has a close relationship with the production of commodity crops. Past studies have analyzed and confirmed these impacts (see Ropelewski and Halpert 1987; Nicholson et al. 2001). Historically, the impacts of El Niño on global supply have been modest, leading to minor price increases, even if production dropped slightly. For instance, during a previous El Niño event, the yields of crops like corn, rice, and wheat decreased by up to 4%, but global soybean production increased by 2.1% to 5.4% (see Iizumi et al. 2014). Studies by Algieri (2014) and Ubilava (2014) have also shown that both El Niño and La Niña phenomena reduce yields, but the price of wheat increased. Research by Naylor et al. (2001) showed that the Southern Oscillation Index (SOI) had a 40% impact on rice production variability in Indonesia. For many agricultural commodities, weather shocks during El Niño can increase prices by 3.5% to 4% (as noted by Brunner, 2002).
Looking at past El Niño events, such as those since 1980 (excluding the current one), only the 2002-03 event saw a slight price increase in agricultural commodities, but that was just due to a comparison with the same period the previous year. In other cases, prices either decreased (as in 1982-83) or changed very little. Even in the strongest El Niño event in 1997-98, which caused an estimated $35-45 billion in damages, agricultural commodity prices still fell.
El Niño’s Mixed Impact on High-Income Countries
Some researchers have argued that El Niño may bring both negative and positive impacts, particularly in high-income countries. For instance, Cashin, Mohaddes, and Raissi (2015) found that while economic growth in countries like Australia, Chile, Indonesia, India, Japan, New Zealand, and South Africa slowed during El Niño, other countries (like the U.S. and many European nations) experienced stronger economic growth.
Domestic Markets Are More Affected
El Niño tends to have a stronger impact on local food markets than on the global market, especially in developing countries. Local markets in producer countries, such as corn markets, are more directly affected by weather disturbances, while global markets are less sensitive and slower to react. For example, local corn prices in producing countries can fluctuate rapidly, whereas global corn prices respond more slowly and are less impacted in the short term.