Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Under the Banyan Tree - El Niño on the horizon
1 Plays2 seconds ago
From food price volatility to export restrictions and an energy crunch, Fred Neumann and Jamie Culling discuss the sweeping potential impacts of extreme weather on Asia's economies.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/n7VMWpB
Stay connected and access free to view reports and videos from HSBC Global Investment Research, just search for #HSBCResearch on LinkedIn or click here: https://www.gbm.hsbc.com/insights/global-research.
Recommended
Transcript
Introduction to El Niño's Threat
00:00:09
Speaker
Welcome to Under the Banyan Tree. I'm your host Fred Newman in Hong Kong. On today's show, a looming threat to Asian economies as a severe anillo threatens both drought and excessive rainfall to various parts of the region.
00:00:22
Speaker
The extreme weather will no doubt put strain on agriculture and food prices, but there are also further risks to energy, infrastructure and economic growth from India to Australia and beyond.
Economist Jamie Culling Joins Discussion
00:00:32
Speaker
Joining me to talk through the potential impact is Sydney-based economist Jamie Culling, who is also part of our global commodities team. Let's get the conversation started right here under the Banyan tree.
00:00:59
Speaker
Well, for anyone unfamiliar with El Nino's, the economic costs are staggering. The scientific journal Nature Communications estimates that the 2015-16 El Nino episode costs the global economy nearly four trillion U.S. dollars, with a significant portion of that being felt in Asia.
00:01:18
Speaker
In that year, India received 14% less rainfall than normal, which is a massive shortfall. And in some parts of the country, the number was more like 40%. Indonesia, Malaysia, and Thailand have historically also been badly hit by the severe weather systems. On that note, let's bring in Jamie in Sydney. Jamie, welcome to Under the Banyan Tree.
El Niño's Impact on Global Agriculture
00:01:39
Speaker
This is your first podcast. I can't believe it took us this long actually to bring you on air ah You've written quite a bit on global agricultural markets. We wanted to bring you in because there is, of course, the El Nino phenomenon brewing in the Southern Pacific. Paint us a picture, first of all, where are we in terms of pressures on global food prices already before even the effects of El Nino start to kind of bite?
00:02:06
Speaker
Yeah, thanks, Fred. So it's great to be here on the podcast with you for the first time. i think a useful starting point is to hark back to the start of this year in January.
00:02:17
Speaker
Global agricultural commodity markets were reasonably well supplied. We came into the year where the USDA, the Department of Agriculture, was projecting record high corn production, record high rice production, record high wheat production, very ample grains supply for the start of this year, and that was keeping prices reasonably contained.
00:02:41
Speaker
Even in commodities in the agricultural space where we did see sharp increases in recent years, we're talking cocoa beans, coffee, orange juice, supply was improving. Prices were coming down for these commodities, mostly because of the good weather and growing conditions.
00:02:59
Speaker
Then, obviously, the U.S.-Iran conflict, the Strait of Hormuz effective closure. ah This has been effectively what we would call a supply shock for agricultural commodities. now That's interesting because we tend to think about the closure of Strait of Hormuz primarily as impacting energy markets. But you're saying that also had a big impact potentially on agricultural markets. Why is that?
00:03:23
Speaker
So it has, and it's largely through two mechanisms, mostly related to fertilizer, but also to energy, as you mentioned. So the Strait of Hormuz accounts for around 30% of global seaborne fertilizer exports. So a large global share of fertilizer typically comes through the Strait of Hormuz.
00:03:43
Speaker
That was effectively constrained for the better part of the first half of this year. Likewise, 50% of global sulfur was constrained. That goes through the straight typically. That was also constrained.
00:03:55
Speaker
Energy prices as well, they shot up. And so you've had effectively inputs, key inputs into the agricultural commodities process, if you will, the growing process, saw higher prices and constrained supply. And so this acts to curtail the supply of much of these agricultural commodities that we track.
00:04:15
Speaker
Now, I imagine that, of course, if you're a farmer in India, if you're farmer in Australia or Southeast Asia, and you're trying to buy fertilizer, but fertilizer is not available or very expensive, you're going to use less of it. um Does that then mean there's going to be a lagged impact? Are we going to see the harvest over second half of the year yielding less because farmers in the first half of the year just had less fertilizer, decided to use less fertilizer?
00:04:41
Speaker
Yeah, so we're not going to see the full impact or know the full impact for at least the next six to 12 months. In saying that, though, global agricultural commodity prices have already responded. Obviously, the prices we track shift very quickly in regards to shifting expectations for things around
Agricultural Market Disruptions
00:05:00
Speaker
supply. And so we've seen wheat growth.
00:05:02
Speaker
corn, rice, barley, palm oil, soybean oil, all of these commodity prices have risen are reasonably steadily over the past few months on just the expectation of this supply shock.
00:05:16
Speaker
Eventually though, as you said, fertilizer will start to curtail yields. where We just don't know to the extent that that is going to happen quite yet. Now, this is, of course, everything we discuss up till now is really a function of the ripple effects of the closure of straighter from moose. Now, on top of this, we're talking about El Nino. And this could be one of the most severest forms that we've had in decades, if not ever. um This usually has big impact on agricultural growing conditions. So how how should we think of El Nino coming on top of this? This is almost a perfect storm then for agricultural markets, isn't it?
00:05:56
Speaker
Yeah, the perfect storm when we're talking about a weather phenomenon is quite appropriate, I would say. So in general, the way I would think about the El Niño is that it is another negative supply risk for agricultural commodities. So it risks weakening agricultural supply, hurting crops globally, and then pushing up agricultural prices.
00:06:17
Speaker
Now, if you look at the economic literature, Estimates vary quite widely for the precise impact globally. This is because the El Nino varies region by region. Even within a country, the El Nino on one coast can have a different impact on the other coast. And so getting a handle on the aggregate impact is quite tough.
00:06:38
Speaker
But in general, the El Nino is thought to reduce agricultural yields, reduce agricultural crops, and push up prices somewhere in the ballpark and in terms of food prices between 5% to 9% over a 12-month period. And that's just for a base El Nino. As i think you mentioned just before, what we're looking at this year is the risk of what would be a strong or a super El Nino, and so the risks are turbocharged as well.
00:07:08
Speaker
So this this actually, the way you describe it, and what we describe is a perfect storm. We had a already stressed agricultural growing conditions because were straight of Strait of Hormuz, and now we're adding the El Nino effect on top of this. Now, this is a global phenomenon, but often what we also observe is that the global agricultural market impact, and then there's local food price impact as well. And can you talk a little bit about how this tends to impact Asia? you know when we read about El Nino, we hear a lot about India. We hear a lot about Indonesia, for example. We hear a lot about Australia even. Those are all big agricultural producers.
00:07:43
Speaker
How does it impact local growing conditions, food prices? And and what are some of the agricultural products that that you think are particularly vulnerable? Yeah, so the local impact is really where I think you see the most impact of the El Niño. The global impact can be quite varied, but locally in some of these countries, you do tend to see quite an impact. For instance, droughts are very common in South and Southeast Asia, Australia, Central America, Southern Africa, whereas in the US and South America, you tend to get a bit more rainfall. um So if we focus in on, let's start, say, with Australia as part of the Asia Pacific,
00:08:22
Speaker
El Nino tends to cause hot and dry summers. You get increased frequency and severity of bushfires, reduced wheat crops and wheat exports. And so that can push global wheat prices up just because of the Australia impact.
00:08:37
Speaker
The commodities that I would focus in on the most, one of the key ones is obviously rice, and that's particularly in relation to India. Now, typically in El Nino and India does weaken the summer monsoon rains.
00:08:51
Speaker
I can defer to Pranjul, who's HSBC Global Investment Researcher's expert on India and the economy. But in general, the El Nino does reduce the rainfall, puts these rain-fed crops such as rice under stress in what is typically a critical growing period. So it reduces rice supply and pushes rice prices up.
00:09:13
Speaker
Another complexity as well is export restrictions coming from some of these countries that experience the El Nino. If you look back over the two previous strong El Nino periods, twenty fifteen sixteen and then more recently around India tended to introduce export restrictions on rice, which while it protected locals, it pushed up global rice prices because it constrained global supply even more. So there's the interaction between not just the El Niño, but policy responses in response to the El Niño as well. That's interesting. So often it is not just the growing conditions that raise food prices, but it's the, if you will, the interference of policy measures that then hampers the global reallocation of commodities because we have export restrictions coming in. and
00:10:08
Speaker
ah you know In India's case, for example, India is a sugar producer and the government already imposed restrictions on sugar exports stretching until September of this year in anticipation of lower local sugar yields and that is pushed up. a sugar prices as well. Now, we talked a lot about a agriculture markets, and that's kind of when you think about El Nino, the first order impact. Of course, we think about food prices, both global but also local, and and there's some evidence that that that might come under strain, particularly given we already have stress because of a
El Niño and Energy Markets
00:10:43
Speaker
straight-up Hormuz. But there's another potential impact here, which is energy markets, because El Nino also, I suppose, puts stress on global energy markets, and Can you talk a bit about that? Because that's often less followed and it does apply to Asia in particular.
00:11:00
Speaker
Yeah, does. So this year, it's not just the El Niño as well. I'd say what we're seeing in real time globally, particularly in the Northern Hemisphere, is the extreme global temperatures this year. Around 50% of the US has been in drought.
00:11:15
Speaker
um We've seen record high temperatures recently in parts of Europe. India has seen very strong temperatures as well. And so, again, you've got this confluence of factors, the El Nino possibility and the strong high temperatures as well that are pushing up energy needs. Now what the El Niño does is it means that some of these sources of energy supply are going to be curtailed. If you see droughts and less rainfall, that could curtail hydro production and in certain parts of the world.
00:11:49
Speaker
Solar production as well, the Niño can reduce some of the solar availability. El Niño can even and affect wind. Part of El Niño is not just the temperature or the water and rainfall, it also tends to weaken wind and so your wind energy can come back as well. And so you've got these downside risks emerging to what we would call renewable energy resources and so that could push up fossil fuel demand going forward.
00:12:16
Speaker
thats That's fascinating because it really feels like for parts of Asia, particularly Southeast Asia, South Asia, we're really going from an energy shock now to an El Nino shock. And some of the challenges are similar. And so there isn't that much relief from a supposed opening of the Strait of Hormuz. I want to take a quick break. And when we come back, I want to take a step back and just look at the broader increase in food price volatility that have we experienced in recent years and whether that's here to stay.
00:12:45
Speaker
A quick message from under the banyan tree. If you're one of our listeners on YouTube, we'll soon be moving. To make sure you'll never miss an episode, head to HSBC CIB on YouTube and hit the subscribe button.
00:12:58
Speaker
Now back to today's episode.
00:13:04
Speaker
So we're back here with Jamie, our our experts on global agricultural markets, of course, also covers Australia and New Zealand economies. ah Jamie, we know we talked a little about El Nino, we talked about the closure of Strait of Hormuz. One might argue that these are short-term disruptions, as severe as they are.
Volatility in Food Prices
00:13:20
Speaker
But, you know, if you take a step back in recent years, last 10 years or so, we have seen these continuous waves of food price increases. And it does feel different. Food prices have, you know, empirically become more volatile over time. There's a lot of explanations for that. But but what do you kind of attribute that to There seems to be, you know more fragility in global agriculture markets, more sensitivity, if you will. What's driving that?
00:13:49
Speaker
So putting my economics hat on you can really tackle this from two directions. You can say, well, is it demand or is it supply? And my general rule of thumb when it comes to agricultural commodities in particular is that it is mostly driven by supply developments.
00:14:05
Speaker
Demand tends to be slower moving, tends to be related to things like population growth. over the medium term, are things like shifting consumer preferences, whereas supply is what has induced a lot of this volatility that you've mentioned. And now the weather is a key factor impacting supply ah for for a lot of these agricultural commodities. The volatility and the sharp increase and decrease that we've seen in lots of the finer food prices cocoa when it reached a record high, coffee, orange juice as well. These prices shot up because of supply side developments, mostly due to inclement weather. And then they've come back because the weather has improved as well.
00:14:46
Speaker
And so you've got near term fluctuations and the weather can have a really outsized impact, as well as the sort of structural trend of higher temperatures over time. I think the literature shows that crops in general are at their best at a temperature below 24 degrees Celsius.
00:15:05
Speaker
And with the Northern Hemisphere, we're already talking temperatures well above this. ah What I would add to that is some of the volatility in recent years as well has come through from geopolitical risk. It's not just the weather and not just the temperature. What we've seen in some markets, for instance, soybeans with the tension between US and China, Geopolitical risk has been a key development that has contributed to some of the volatility that we've seen.
00:15:31
Speaker
um That's very helpful context because I think it does show that there's more going on than just a temporary El Nino or just a temporary close-up straight up Hormuz. They're really structural forces that are pushing up like climate change, like increased geopolitical risk. They're pushing up food price. And of course, we shouldn't forget that it's usually society's poor members that do suffer from this increase in prices. you know Rich countries, countries. More affluent consumers tend to be more shielded. But of course, it's the millions of people in South Asia, Southeast Asia, or Africa that are bearing the brunt of this.
Conclusion and Call to Action
00:16:08
Speaker
Jamie, thank you so much for coming on. We will need you to come back on the show as El Nino progresses into year end. We're certainly going to track developments in our cultural markets very closely. So thank you for joining us here under the Banyan tree.
00:16:23
Speaker
Thanks, Jared.
00:16:27
Speaker
Well, that's a wrap for today's episode, ladies and gentlemen. Thank you for joining us. And do remember to subscribe to Under the Banyan Tree if you haven't already. We're all available wherever you get your podcast.
00:16:38
Speaker
From all of us here at HSBC Global Investment Research, take care. Till next time.