Return of El Nino would lift food prices, inflation in emerging Asia

May 8, 2014

SINGAPORE – The dry conditions of the El- Ninõ weather phenomenon is widely expected to return this year with a vengeance, possibly as early as July, according to various climate models, says ANZ Bank, warning that the prospect raises concerns of a repeat of higher commodity and food prices due to weak monsoon rain.

Asia’s emerging markets are vulnerable to the higher food prices, says ANZ, pointing out that food prices have played a significant part in the region’s inflationary episodes. “This is consistent with the fact that food accounts for around 20% of the food basket in Indonesia, 36% in the Philippines, and almost 50% in India,” ANZ says.

“Food prices are susceptible to agriculture shocks which cause short-run inflation spikes and could lead to sustained increases in inflation, especially if inflation expectations are unhinged. This dynamic is already evident in recent higher food inflation prints across the region. Most ASEAN economies such as Malaysia, Thailand and Philippines saw food inflation tick up, exacerbated by recent dry weather conditions.”

However, ANZ believes the impact will be mitigated by ample rice stocks across major producers and exporters, as well as lower potential growth across EM Asia. “We are also unlikely to see the sharp surge in palm oil prices during the 2009-2010 El Ninõ episode,” ANZ says, “as substantial stocks of competing vegetable oils are capping prices. However, a strong event with a pronounced impact on production cannot be ruled out.” But ANZ adds that dynamics such as rice export restrictions by major exporters that contributed to prices surging in 2009-2010 are (fortunately) absent today. www.live.anz.com (ATI).