Indonesia Prepares for Drought as United Nations Agencies Warn of a Strong El Niño

What this means

El Niño affects prices through lost harvests and through government policy. Drought in Indonesia and Malaysia reduces palm-oil yields with a lag of several months. Dry weather in Southeast Asia threatens rice. Governments of food-producing countries tend to respond by restricting exports, which shifts the shortage onto importers. The most recent precedent is July 2023, when India banned exports of non-basmati white rice during an El Niño year and Asian rice prices rose sharply in the following weeks. The parties exposed are food-importing emerging markets in Africa and South Asia, whose currencies and inflation rates depend on grain and cooking-oil imports, and central banks there that may have to raise rates on a supply shock they cannot control. Producers holding stocks gain. From a sound-money view, this is a real shortage of goods, and cheap credit cannot solve it. Rate cuts in importing countries would add currency weakness to food inflation. The desk's read: if the strong El Niño forecast holds, expect at least one major Asian food producer to restrict exports within months, and food inflation in import-dependent emerging markets to rise through 2027. A weakening El Niño in the next official forecasts would prove this wrong.