As most of Australia basks in mild autumnal weather at the moment, the weather bureau has stiffened its warning of the chances of a major dry period (an El Nino event) occurring later this year.
El Nino weather events can trigger extreme weather patterns around the world and disrupt commodities markets, especially foodstuffs such as wheat, sugar, oilseeds and various meats.
Such an event would impact adversely the Australian consumer price index – the March quarter report will be issued later this morning.
Sales by retailers such as Woolworths and Coles have been impacted in the past by higher food price costs. El Nino events can both lower food prices as farmers are forced to dump production at lower prices to raise cash to survive, then raise prices as foodstuffs become scarce.
One key impact is that the warm dry growing conditions along the east coast can mean lower fruit and vegetable prices – in contrast to what we have seen at times in the past year as wet weather has damaged crops.
For this reason, El Nino events raise speculation about interest rates from the Reserve Bank because they can at times push food prices higher, thereby raising inflation above the 3% top of the central bank’s target range. The CPI will be at or above an annual rate of 3% in the report to be issued later this morning.
The Australian Bureau of Meteorology said yesterday in an update that six of seven weather models suggested sea surface temperatures in the Pacific could exceed El Niño thresholds mid year.
"The likelihood of El Niño remains high, with all climate models surveyed by the Bureau now indicating El Niño is likely to occur in 2014. Six of the seven models suggest El Niño thresholds may be exceeded as early as July," the weather bureau said in its update.
"The Pacific Ocean has been warming along the equator over recent weeks, with continued warming in the central Pacific likely in coming months. Another burst of westerly winds is presently occurring in the western Pacific, and is likely to cause further warming of the sub-surface.
"El Niño has an impact across much of the world, including below average rainfall in the western Pacific and Indonesian regions, and increased rainfall in the central and eastern Pacific. For Australia, El Niño is usually associated with below average rainfall, with about two thirds of El Niño events since 1900 resulting in major drought over large areas of Australia.
"The Indian Ocean Dipole (IOD) is currently in a neutral state. Model outlooks currently suggest the IOD is likely to remain neutral through late autumn and early winter, with two of the five models surveyed suggesting a positive IOD may develop by early spring. Positive IOD events often coincide with El Niño and are typically associated with large parts of southern and central Australia experiencing lower rainfall than usual," the bureau concluded.
Besides boosting Australian inflation, El Nino events have disrupted metals markets (heavy rain in some countries, such as Peru and Indonesia limit production), and increased possible shortages of coffee, cocoa, cotton and soybeans in particular, and of course lowers the size of the Australian grain crops. Australian meat prices fall, then rise as well as farmers adjust top the encroaching dry period.
In fact the real danger will be to food prices in Australia in a year’s time.
If the El Nino event impacts Indonesia badly, then it could help boost global prices of thermal coal by flooding mines (to the benefit of the Australian coal exporting sector which is currently feeling the impact of weaker prices).
And an El Nino event will lessen the chances of weather events, such as cyclones limiting iron ore production and exports in the first quarter of 2015 (thus reversing what we have seen for the past four years of heavy rain and weather during the La Nina event).
