El Niño, the climate phenomenon of the tropics, has the power to impact GDP, food inflation, and social stability. According to Aviva Investors, some countries may see direct and short-term impacts, while in others, the impact can be for a longer term. “It depends when the ocean warming occurs and how that impacts atmospheric temperature and rainfall. Some zones get hotter and drier; others get much wetter,” says Rick Stathers, Climate Pillar Lead at Aviva.

The financial cost of El Nino can amount to trillions of dollars, as per Aviva. Stathers cautions that the impacts could be substantial this time due to a lot of energy being stored in the ocean system. He further explains that the already high sea surface temperature indicates more available energy to drive extreme events.

The economic impact of El Nino would be mixed, as per Aviva. It states that the climate condition could be advantageous for Argentina as it would bring higher rainfall to a drought-faced country, positively impacting the output of corn and soybeans.

On the other hand, El Nino will hurt India if the monsoon brings less rain. Less rainfall can spur food inflation in India, explains Stathers. This could also affect the Indian government’s food subsidy programme, and the central bank’s interest rate strategy. At the same time, the asset manager points out that the impact is likely to be complex in a country like China, which could witness higher rainfall and floods in some parts and drier conditions in others.

Next, Aviva discusses the impact of El Nino on the prices of agricultural commodities. According to the asset manager, the three largest corn exporters, the US, Brazil, and Argentina, would experience neutral to positive impacts from the climate condition. On the flipside, cocoa, coffee, sugar, and palm oil would see a more notable price impact due to their concentration in the tropics. Rice prices in Asia would also tend to rise, adds Stathers.

Additionally, El Nino is likely to have a potential impact on food inflation. Carmen Altenkirch, Emerging Markets Sovereign Analyst at Aviva, elucidates, “The European Central Bank recently suggested a one percent increase in temperature during El Niño could lead to a six percent increase in food prices over 12 months.” Altenkirch, further expects a larger inflation impact in Southeast Asia and parts of Africa where food comprises a larger share of CPI.

Speaking about the sector-level impact, Stathers particularly highlights South America’s utility companies and palm oil producers. He opines, “Whether exposure is material at an individual company level depends on the diversification of commodity exposure and extent of vertical integration.” Stathers also expects volatility in coffee, cocoa, and sugar prices, which could further impact companies further up the food value chain. 

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