Wednesday, July 01, 2009

Could drought derail everything?

Stephen Koukoulas:

"We have enough difficulty forecasting the economy and markets, so we are not about to delve into long run weather forecasts. But this story has popped up on Reuters and it notes that El Nino is “all but certain” this year. For Australia, this means an “all but certain” drought.

While farm output is a small share of GDP (about 2.5%), even a 20% fall in output will cut GDP by about 0.5 percentage points. Rural goods make up about 11% of exports, so a severe drought would hurt the trade accounts...


The drought shouldn’t have a huge impact on RBA deliberations (even Glenn Stevens can’t make it rain) but with the drought occurring at a time of recession elsewhere in the economy, the gloomy mood is likely to impact negative on the economy as a whole. At the margin, it adds to the case for lower interest rates. It may also weight on the AUD given a likely sharp deterioration in the trade accounts.

Reuters Story is below:

El Nino seems all but certain - Australia Met Bureau

* El Nino weather event may be declared within weeks

* Australia wheat crop, India sugar at risk from weak rains

* New El Nino update due July 8

By Bruce Hextall and Michael Perry

SYDNEY, July 2 (Reuters) - An El Nino weather pattern this year appears almost certain, Australia's Bureau of Meteorology said on Wednesday in a revised forecast, raising the prospect of drought in Australia and a even weaker monsoon in India.

The odds for El Nino, an abnormal warming of the eastern Pacific Ocean that creates havoc in weather patterns across the Asia-Pacific region, had risen significantly since two weeks ago, when the bureau said there was a more than 50 percent chance.

"El Nino is a little bit like recession, you are in it before you can say you have one. If it continues as it is now, the historians will say the El Nino started in May," said David Jones, head of the bureau's climate analysis, told Reuters.

He said they could declare a full El Nino within weeks.

That's probably bad news for farmers in Australia who have sown near record acreage, and in India, which is already bracing for below-average monsoon rains, the lifeblood of the country's agriculture.

It would also have implications for commodity markets, potentially lifting wheat prices that have slumped over the past month on expectations of a bumper global harvest, and adding further fuel to soaring sugar prices that are already bracing for a second disappointing crop year from top consumer India.

Most of Australia's 2009/10 wheat crop has been planted following plentiful rain, leading to forecasts of a harvest of as much as 23 million tonnes, the best since 2005/06 when 25.2 million tonnes were harvested.

"The growers I speak to say if we were to get some rains in spring we could get above average yields. But if the El Nino forecast materialised, we are again at risk of having a sub-standard crop," said Richard Koch, managing director of farm advisory firm Profarmer.

Australia's grain production is still recovering from the worst drought in more than 100 years that cut the annual wheat harvest to as little as 10.6 million tonnes in 2006/07.

India's weather office last week cut its forecast for the June-September monsoon rains by 3 percentage points to 93 percent of normal, after four years of above average rainfall. From June 1 to June 24 rains were 54 percent below normal.

A severe El Nino spawns searing drought in countries in southeast Asia, harming rubber production, while causing heavy flooding in Peru, Ecuador and Chile, among others.


The bureau's latest report found that the eastern Pacific Ocean was continuing to warm, with sea temperatures one degree Celsius above normal, and trade winds were continuing to weaken.

The Southern Oscillation Index (SOI), calculated from monthly and seasonal fluctuations in air pressure between Tahiti and Darwin, remained at around negative 2, while the monthly value for May was negative 5.

A sustained negative SOI often indicates El Nino.

"A more complete picture of the situation in the Pacific will be available next week when the final June indices are calculated," said the report on

The next report is due on July 8.

The Climate Prediction Center in the United States said in June that conditions were favourable for a switch to El Nino conditions during June to August.