A predicted El Niño weather event in Australia has led analysts to issue warnings about the impact on farmers and on commodities markets.

The extreme weather phenomenon is likely to lead to further droughts in a country where farmland has already been parched due to poor rainfall. The Australian Bureau of Meteorology (ABM) has predicted a “moderate to strong” El Niño event, which will be the first such occurrence since 2010.

According to the ABM, an El Niño occurs when sea surface temperatures in the central and eastern tropical Pacific Ocean become substantially warmer than average, and this causes a shift in atmospheric circulation. Typically, the equatorial trade winds blow from east to west across the Pacific Ocean. El Niño events are associated with a weakening, or even reversal, of the prevailing trade winds.

Such an event can lead to floods in one place and scorched plains elsewhere.  Australian farmers are gearing up for a tough winter ahead. Just how tough, nobody yet knows.

El Niño appears to account for almost 20% of commodity price inflation movements over the past several years. IMF

Australia has a long history of suffering through El Niño events. In 1982-83, it led to a 92% decrease in rainfall in New South Wales. The El Niño of 1997 led to a 90% rise in droughts in the same state, while leading to over 23,000 deaths worldwide, becoming arguably the most significant occurrence recorded.

The impact on commodities and food prices can also be severe. An IMF paper from 2002 found that El Niño “appears to account for almost 20% of commodity price inflation movements over the past several years. El Niño also has some explanatory power for world consumer price inflation and world economic activity, accounting for approximately 10% to 20% of movements in those variables”.

“Its impact on weather and crop yields depends on three key features – its timing, strength and duration,” Hamish Smith, commodities analyst at Capital Economics tells GTR. “Drier than normal conditions would affect the development of winter crops such as wheat for which spring rainfall is key for production and yields. If the El Niño continues to strengthen and persists through into the summer, other crops such as sugar could also be negatively affected.”

Given that Australia is a leading exporter of wheat and sugar, disruption to the harvest could lead to rises in food prices. Australia is also a huge exporter of beef and lamb and many Asian markets have become large importers of these meat products, with restaurants from Seoul to Jakarta advertising Australian steak, lamb shanks and briskets in their windows, a perceived indicator of quality.

Less rainfall over Queensland now could see the price of beef go up further. Phin Ziebell, National Australia Bank

Farmers have thus far coped well with below average rainfall, but further drought could have a significant impact.

“We’ve seen record exports in the beef and dairy sectors, in spite of weather conditions. Prices for beef have also skyrocketed this year. The international fundamentals for beef exports are strong. Less rainfall over Queensland now could see the price go up further,” Phin Ziebell, an agribusiness economist at National Australia Bank tells GTR.

One thing that may limit price volatility, particularly in the soft commodities sector, is the fact that many markets are awash with supply. Grains and pulses have suffered significant price drops over the past number of years, due to oversupply on the market.

Analysts suggest that this overcapacity in the market should be able to cope with any reduction in production in Australia, meaning that food prices further afield may not be as dramatically altered as they have been in the past.

This will be of scant consolation to the farmers affected, though, who will be hoping that the El Niño event predicted will be a notch down from the most serious on record.