El Niño: Investors should heed warnings of climate disruption, says HSBC

In climate change circles, not to mention climate sceptic circles, there has been much ado about the coming El Niño. The climate phenomenon that “tilts the odds towards warmth”, and other potentially dire consequences, was officially declared by various global meteorological institutions – including Australia’s BOM – in the first week of May.

But questions abound. Will it actually come this time? Will it be anywhere near as devastating as the 1998 event? Where does it fit with global warming? Should we even be worried?

According to global banking group HSBC, the answer to that last question – for investors, at least – is a solid “yes”.

In a report dedicated to the potential economic impact of this year’s El Niño on the Asia region, HSBC addresses all of the above questions and recommends taking the issue seriously, particular the impact it could have on food production.

“Once again, agencies in the US, Australia and Japan warn of warming water temperatures,with their caution carrying a higher degree of conviction than last year,” says the report, released on Thursday.

“Investors had better listen: …in the past the weather phenomenon has proved highly disruptive. This is even more the case when a rise in food prices is coupled with an increasing oil price (memories of 2008 are still strong).”

According to the report, the direct – and most important – impact for Asia is that most of Equatorial Asia and Australia will receive less rain, cutting into agriculture output and yields. For Australian states like Queensland, much of which has been drought declared for just over two years now, this is not good news.

For example, the report says, wheat production in Australia would likely take a hit, as drought conditions worsened and spread.

“In addition to its direct use, wheat is a major feed component for across the region,” says the report; “and could cause a pass-through impact to various foods.”

Scientists agree. Dr Nick Klingaman from the UK’s University of Reading warns that the 70 per cent likelihood of a “moderate” El Niño could see coffee plantations in Brazil, “already on the brink of failure,” jeopardised, while reduced rainfall in Australia could affect banana and sugarcane crops as well as cattle herds.

“In extreme cases,” the HSBC report warns, “the lack of rainfall may cause widespread crop damage and turn Indonesian land-clearing forest fires into massive conflagrations, with smog clouds choking citizens of Singapore and Kuala Lumpur.”

HSBC believes even a slight pick-up in food inflation could be significant, thanks to the low base effect from last year’s decline in oil prices, which it says will feed through to inflationary pressures especially in Indonesia, Malaysia and India, where fuel subsidies have been either abolished or liberalised over the past year.

Rising fuel prices could also push food costs higher, with fertilizer and transportation becoming more expensive, there report says.

“This means that El Niño disruptions could feed directly into some of the calculus central banks will take into consideration for policy.

“We think the most tangible impacts will occur in the three countries most susceptible to food price shocks – India, the Philippines and Indonesia.”