The most severe El Niño weather event on record threatens to push food prices higher this year, experts say, piling pressure on households already struggling with the post-pandemic spike in grocery bills and complicating the Reserve Bank’s efforts to bring inflation back under control.
The Bureau of Meteorology has forecast El Niño will peak in late spring or summer and “reach levels above the warmest observed since reliable records began in ۱۹۵۰”.
Michael Harvey, a consumer food analyst at Rabobank research, said the predicted hot and dry weather in key growing areas in eastern Australia was “clearly one of the key issues that will have an impact on food pricing over the next ۱۲ months”.
The Food and Agricultural Organisation in its latest update reported rising weather-related threats are already being reflected in high and climbing global commodity prices.
“It’s a very volatile time, and there are lots of risks around cost re-escalation in the food system,” Harvey said. “There is absolutely risk of food inflation coming through at the consumer end.”
Not all commodities are heading in the same direction, however. For example, dairy and meat prices are beginning to ease after a big recent rise as the underlying fundamentals in those markets shift independently of the looming weather event.
In Australia El Niño created a risk for what is still expected to be a strong winter wheat crop this year, Harvey said.
“That will be the big thing to watch, as well as the spillover effects of that into things like feed grains,” he said, adding that the ultimate impact would be clear by the final quarter of the year.
Even absent hotter and drier weather, overseas shocks have already pushed commodity price benchmarks higher this year, which are linked to local markets through the export trade.
Dennis Voznesenski, CBA’s agricultural economist, said global wheat prices are up by about a third since the start of July, versus about ۹% in Australia.
The extreme weather warnings also come as the global oil benchmark, Brent crude, pushed past US$۹۷ a barrel on Monday afternoon to be ۳۵% higher since the start of July.
With diesel prices on the rise again – a key cost for farmers – fertiliser suppliers have also warned of ongoing supply disruptions that will keep prices structurally higher.
Meanwhile, Russia and Ukraine’s record grain harvests are struggling to find their way to international markets after tit-for-tat attacks on critical Black Sea ports.
“A third of global grain exports are stuck right now,” Voznesenski said.
The past five years have seen rapid increases in prices across a range of supermarket goods, contributing to an entrenched cost-of-living crisis across Australia.
In the five years to June, for example, the cost of staples such as breads and cereals, dairy, and other products such as jams and eggs, jumped by between ۲۸% and ۳۰%.
In comparison, in the preceding five-year period to mid-۲۰۲۱, the cumulative increase in these supermarket shelf items was ۳-۶%, according to analysis of quarterly Australian Bureau of Statistics data.
RBA officials are concerned that a particularly severe El Niño could drive food prices higher and create a further headache later this year, at a time when the central bank is already contemplating whether it needs to raise interest rates again.
But Jonathan Kearns, the chief economist at Challenger, said it was not easy to show a clear link between El Niño events and higher food prices, saying there were a range of costs – from labour to freight and packaging – that often played a bigger role in determining how much Australians pay at the checkout.
“It won’t be a first-order influence on overall inflation, but if you get a little bit extra from food prices, then it’s unhelpful,” Kearns said.
