Farmers work on a field outside Lichtenburg, a maize-growing area in the North West. The Food and Agricultural Organisation is predicting El Nino will continue to affect food prices this year. Picture: REUTERS/SIPHIWE SIBEKO
Farmers work on a field outside Lichtenburg, a maize-growing area in the North West. The Food and Agricultural Organisation is predicting El Nino will continue to affect food prices this year. Picture: REUTERS/SIPHIWE SIBEKO

WHEN El Nino wreaked havoc on the world’s population last year, causing floods in Southeast Asia and rains in Brazil, it also damaged crops, especially sugar and palm oil. In October, prices shot up, particularly for sugar.

The sudden spike in sugar prices illustrated the economic effect of the unusual weather events triggered by El Nino, which is expected to disrupt the prices of commodities further this year.

But the rise was a rare exception — international prices for most foods including sugar and dairy, have been falling for the past four years.

Overall, the Food and Agricultural Organisation’s food price index was still 19% lower in 2015 than the previous year, according to figures released on January 7.

The index has been sliding in part because of the strengthening US dollar, which is the benchmark for global commodities, as well as the surplus in some food basics.

The food price index is a monthly trade-weighted measure tracking prices on international markets of five major food commodity groups: cereals, meat, dairy products, vegetable oils and sugar.

"Abundant supplies in the face of a timid world demand and an appreciating dollar are the main reason for the general weakness that dominated food prices in 2015," said Abdolreza Abbassian, a senior economist at the organisation.

Agricultural prices, as measured by the price index, have fallen almost 30% since 2011 due to increased production. But the organisation acknowledges that extreme weather could still introduce some turbulence to global commodities markets.

In Indonesia, El Nino caused the opposite problem to Brazil — excessive dryness, which affected the production of palm oil and pushed up prices briefly.

Reports of crop damage caused by drought in Thailand, India, the Philippines, SA and Vietnam also raised international prices of vegetable oils last year, rises that were amplified by fears of intensified damage from El Nino this year.

Stefan Vogel, head of agricultural commodity markets research at Rabobank, said the weather would continue to be a key driver in commodities markets over the next year.

"We currently see El Nino, one of the strongest on record, affecting sugar, cocoa, palm oil and robusta coffee crops," he said. "El Nino is expected to gradually weaken in the first quarter of 2016, but its effects will continue to affect the commodity price."

Weather patterns associated with El Nino are also expected to hit cereal production in parts of Africa, Asia and Oceania, while several countries in Central America and the Caribbean, as well as in Asia, have already been affected. Dry weather in northern India cut local cereal production in the 2015 season.

Nevertheless, cereal costs have fallen, especially the price of coarse grains, due to favourable harvests in the US.

Although rice, wheat and maize make up about two-thirds of the world’s food consumption, no one is forecasting a return to the febrile markets of 2007 and 2008, when record highs in food prices sparked riots.

Wheat supplies remain high and prices relatively low as a result of record production of grains and oil seeds from SA.

But the organisation’s Cereal Supply and Demand Brief has slightly trimmed its forecast for world cereal production in 2015-16, which is now 2.53-billion tonnes, or 1.3% below the previous year’s record. This is mainly because of a lower forecast for maize production in China.

Lower oil prices will curb demand for biofuel crops.

As a result, the use of cereal worldwide is expected to grow just 1% in 2015-16.

"All in all, we expect grains to continue to trade around current levels, as weather-related risks are counterbalanced by currency weakness in many key producing countries, whereas we expect some upside on coffee, sugar and cotton," Vogel said.

Last year, all agricultural sectors covered by the organisation’s food price index posted double digit declines. Dairy prices led the way, with average prices down 28.5%, suggesting that importers have adequate stocks.

Sugar fell 21%, vegetable oils declined 19%, cereals shed 15.4% and meat lost 15.1%.

Meanwhile, the organisation continues to stress that food security remains a great concern globally.

eople in 33 countries, with the majority in Africa, may face food shortages either because of El Nino-prompted drought and floods, or violent conflicts, particularly in Syria and Yemen.

Financial Times Limited 2016 (c)