El Niño's economic impact: What the brokers say

This report collates the analysis of some of the broker research that has been published about El Niño since 2014, when El Niño failed to materialize despite early warnings, to August 2015, when various meteorological offices from around the world indicate a strengthening El Niño that is likely to persist into the spring of 2016.

We summarize how an El Niño occurs and where its impacts are, before looking at the national level impacts (both from a physical and monetary level), impacts on soft commodities (production and price response) and the sectors (agricultural value chain, electricity generation, mining) and companies that may have exposure to it.

Our report finds that the impacts of El Niño at a national level will vary, predominantly determined by the contribution of primary industries (e.g. agriculture, mining) to a country’s economy and that this can influence inflation and monetary policy as a result. At the soft commodity level, most have demonstrated a price response to historical El Niño events; this is potentially greatest for palm oil given the geographical concentration of its production in the Pacific (though a substitution to soy oil tempers this impact).

The global production of other agricultural crops will lessen the price impact and this may reduce the impact of El Niño on company margins within the food production value chain. The impact on utilities will depend on their geographical location, hydro generation will have the highest exposure which, in some countries, can cause increased demand for coal fired generation. There may also be impacts on the insurance and retail sector

Overall, though, it would appear that the major impacts are on palm oil production and the economies of some Pacific states.

However, as one broker notes, “history has warned that we shouldn’t underestimate the influence of El Niño”.

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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.