Impact of El Niño on food should only be felt from 2024

Fears of an “El Niño”, a climatic phenomenon resulting from the warming of the waters of the Central Pacific, stronger and the end of the agreement for the outflow of the Ukrainian grain crop through the Black Sea, should not have major impacts on the price of food in the Brazil this year.

The coordinator of price indices at the Brazilian Institute of Economics at the Getulio Vargas Foundation (FGV Ibre), André Braz, points out that a more moderate food inflation is already “contracted” for this year.

The expectation is for a small rise in food prices in 2023: 0.7% compared to 2022, according to XP Investimentos. In the 12 months ended in June, according to the IPCA, food prices at home accumulated an increase of 2.24%, the lowest since the beginning of the IBGE historical series that started in December 2020.

According to him, despite the fact that, on the Chicago Stock Exchange, wheat and corn prices are registering volatility due to the breach of the agreement, there is still a lot of “fat” to be burned. International quotations are 30% lower than a year ago.

Other factors that help are the super harvest in 2022/3 and the less heated world demand. Data from the National Supply Company (Conab) point to a harvest of 317.6 million tons in the period, 16.5% above that recorded in the previous cycle. It is the largest ever produced in the country, highlights the organ.

International demand is more contained due to the maintenance of world inflation at high levels. The International Monetary Fund (IMF) projects 6.8% for this year. Central banks in regions such as the European Union, the United States and the United Kingdom are cooling demand through a more restrictive monetary policy.

“The global economy shows signs of fragility and limits the space for more robust price increases obtained with exports”, highlights the agro consultancy of Itaú BBA in a report.

Specific issues may affect food prices this year

There are specific issues that may affect food prices this year, points out Braz, from FGV Ibre. One of them is if there is an intensification of cases of avian flu in the country, affecting creations on a commercial scale. So far, sporadic cases have been reported in subsistence farms or in the wild.

Another is if the lack of rain in beef producing regions gains more strength. “This can make the pastures drier, forcing the producer to spend more on feed”, says Braz.

Changes in the rainfall regime also impact food inflation. “With increased rainfall in the last quarter of the year, prices of products such as fruits, tubers and vegetables tend to be more pressured, with a temporary impact on inflation”, highlights a report by Itaú.

Given this scenario and the projections of the National Oceanic and Atmospheric Administration of the United States (NOAA), inflation may increase by 0.1 percentage point in 2023.

Market pays to see what happens with the War in Ukraine

The end of the agreement brokered by the United Nations (UN) for the outflow of the Ukrainian crop through the Black Sea should not have major impacts on cereal prices, say analysts interviewed by the People’s Gazette.

The expectation is that the historic prices registered last year will not be reached. “The effect on quotations should be limited and should not cause greater pressure on global supply”, points out Francisco Queiroz, grain analyst at Itaú BBA. Those who may feel it the most are the countries of the Middle East and Africa, which are more dependent on Ukrainian cereals.

“The market is paying to see what happens in Eastern Europe. It’s hard to predict what will happen”, says the relationship manager at hEDGEpoint Global Markets, Andrey Cirolini.

He recalls that Ukraine, an important producer of wheat and corn, is managing to sell part of its production by river or land. But Russia has attacked Ukrainian port terminals and facilities used for food storage.

The Russians, on the other hand, are managing to sell their production to allied countries. And they had a record grain harvest. Estimates by the United States Department of Agriculture (USDA) point to a harvest of 92 million tons of wheat, 22.46% more than in the previous year. Inventories are expected to grow by 37%.

Bigger impacts of El Niño only in 2024

Braz points out that El Niño should be more of a concern for 2024, as it may reduce the volume of rainfall in important producing regions, such as Matopiba – a region formed by areas of Maranhão, Tocantins, Piauí and Bahia.

The expectation of economist Priscila Trigo, from Bradesco, is of an El Niño with weak to moderate intensity. “We can expect good grain production in general, with an increase in the American crop, in development, and in South America, which will be planted now in the second half”.

Itaú’s prospects are of a moderate to strong intensity, but still lower than observed in 2015-6. “We hope that the current phenomenon has a limited impact on the Brazilian harvest”, highlight analysts Júlia Passabom, Natália Cotarelli and Luciana Ribeiro.

The bank’s projection is for a slowdown in agro GDP to 2.5% in 2024, after a strong increase of close to 12% this year, in the face of a slight increase in soybean production and a fall in the next corn crop.

If the climate anomaly gains much strength, the scenario becomes much more uncertain. For Itaú, an “El Niño” of similar intensity to that which occurred in 2015-16 would have a negative impact of 0.3% to 1.3% on the GDP of the countryside.

For Bradesco, if this scenario prevails, the situation tends to be worse. “Replicating what happened in the last strong event, in 2015-6, the drop in the grain harvest could reach 10%, leading to a reduction of 3.75% in agriculture GDP”, highlights Trigo.

The impact, with a relevant crop break, could be an inflation of food at home between 8% and 9%, with emphasis on cereals and industrialized foods, points out Bradesco.

The USDA projects growth of 4.4% in the next world grain harvest (soybeans, corn, wheat and rice). The biggest problems would be in the production of wheat and rice in Asia, sugar in India and coffee in Vietnam and Colombia. Cotton would also face an adverse situation in Australia and Asia.

If the intensity of the weather anomaly changes to strong, the effect may be different. This was what was observed the last two times that it occurred at this magnitude: in 1997-8 and 2015-6. According to Trigo, in the first period the global production of grains grew 2.6% and that of sugar, 0.9%. Food prices in the world fell by an average of 8.7%, driven by cereals and sugar.

The scenario in the second period was different, global grain production fell by 1.8% with breaks in Brazilian, Argentine and Asian production. The sugar harvest was 7.1% lower than the previous one. Food inflation rose 9.2%, driven by grains and sugars. Trigo, from Bradesco, points out that the effects are uncertain.

New supercrop is not ruled out

Cerolini, from hEDGEpoint Global Markets, does not rule out the possibility of a new record in the grain harvest. Production in Rio Grande do Sul can offset any problems with a neutral to drier scenario in the Midwest.

“The droughts caused by La Niña brought down agricultural production in the state. A normal grain harvest in the state would be 21 to 22 million tons. This year between 13 and 14 million were harvested,” he says.

Queiroz, from Itaú BBA, has a favorable assessment of the prospects for the next soybean crop. The expectation is for a smaller growth in the planted area, estimated at 1%. Production gains would come with an increase in productivity. The USDA estimates a 4% growth in the harvest, which would reach 163 million tons.

As for corn, the expectation is for a drop of 3% in domestic production. The current scenario of lower prices and compressed margins should influence the decision of Brazilian farmers for the 2023/4 crop year. “The perspective is that the producer reduces the technological package and stops cultivating marginal areas”, says Queiroz.

On the external side, there should be greater maize availability in the next harvest, since, according to the US Department of Agriculture, production should increase in two – USA and Argentina – of the three largest exporters in the world. “This suggests greater availability for cereal exports”, highlights a report by Itaú BBA. Brazilian exports to China tend to remain firm.