El Niño is hitting your wallet
The price of shopping is rising, with chocolate costing more, coffee prices fluctuating, and many other food products also becoming more expensive. Our economy is increasingly vulnerable to extreme weather, which may be caused by events close to home or thousands of kilometres away. Take El Niño, for example. This weather phenomenon originates in the Pacific Ocean, but its economic consequences can ultimately make their way into our wallets.
A word from Anthony Sandra and Dea Shehu, portfolio managers at KBC Asset Management, warning us of the economic impact of El Niño.
The impact of extreme weather events on your groceries
Most people first notice the impact of extreme weather when they go grocery shopping.
When droughts, floods or extreme heat hit major agricultural regions, the consequences rarely remain local as harvests produce poor yields, transport is disrupted and prices respond accordingly. Products such as coffee, cocoa, palm oil and sugar are traditionally among the commodities most sensitive to El Niño.
In the past few years, the tremendous surge in cocoa prices has highlighted that problems at play thousands of kilometres away can rapidly trickle down to European grocery prices – and this is not limited to just cocoa. In a globalised economy, weather conditions increasingly impact global production and transport chains, and ultimately the prices consumers pay.
When we talk about El Niño, we aren’t just discussing the weather; we are considering how vulnerable our economy has become to disruptions in food production, water management and global supply chains.
Anthony Sandra, Portfolio Manager at KBC Asset Management
The impact doesn’t stop at the cash register
Government authorities foot the bill too
The consequences are not felt only by consumers, businesses and insurers. Government authorities also increasingly invest in water management, flood protection, heat-resilient cities and climate-proof infrastructure. Flanders, too, is setting aside additional funds to tackle drought, flooding and the mounting pressure on water supplies more effectively. That is no coincidence. This summer’s dry spell has led government authorities and water managers to call on the public once again to use water sparingly, and drought measures were introduced in several places.
These investments are necessary. Nobody wants to wait for bridges, roads, waterways or the energy supply to collapse before taking action, but the measures don’t come for free. Whether these investments are made in dikes, water retention, sewerage works or flood protection, society ultimately has to foot the bill.
In other words, extreme weather doesn’t just affect us through the news. It affects our receipts and invoices, our insurance premiums and the investments government authorities must make to improve the resilience of our economy.
Is El Niño entirely to blame?
Where extreme weather conditions follow each other in rapid succession, the same name tends to crop up: El Niño. This natural weather phenomenon occurs when part of the Pacific Ocean temporarily warms up, potentially disrupting weather patterns elsewhere in the world. Still, not every heat wave, wildfire or period of drought should automatically be attributed to El Niño.
The recent heat waves and wildfires in Europe and the drought Flanders suffers on a regular basis are mostly the result of broader climate change. Extreme weather conditions become more frequent, last longer and grow more intense as the planet warms. The World Meteorological Organization also points out that both natural phenomena and human-induced climate change are contributing factors, but that long-term warming of the climate system is a major driving force behind the increasingly extreme conditions.
That is an important distinction. We like to find a single clear explanation for complex events, but reality is rarely that simple. El Niño is not the only culprit behind all of today’s climate events. It may amplify existing problems and make certain regions more vulnerable, but the broader trend of climate warming is a separate issue altogether.
In Europe, the economic consequences of El Niño are often more important than its direct impact on the weather. Disruptions to harvests, commodity flows and international trade in other parts of the world may eventually also affect our economy in positive and negative ways.
The impact of El Niño generally has both positive and negative aspects. While some regions and sectors may come under pressure, others may benefit from better harvests, greater supply or more favourable weather conditions.
Dea Shehu, Portfolio Manager at KBC Asset Management
How will this affect your investments?
What at first seems to be merely a weather phenomenon may ultimately be reflected in corporate earnings and stock market performance.
Disruptions to major trade routes may drive up transport costs and put pressure on supply chains. Even today, we are seeing this in and around the Strait of Hormuz and Bab-el-Mandeb, two passageways that are crucial to global trade. If this is compounded by extreme weather conditions, the impact could rapidly escalate. During the 2024 El Niño drought, for instance, low water levels in the Panama Canal limited shipping traffic. What starts out as a higher price in the shop for consumers may lead to higher costs, delays and lower profit margins for businesses.
Not every company feels the effects in the same way, though. A shortage of agricultural commodities such as sugar, rice, coffee, cocoa or palm oil may be favourable for farmers, producers and agricultural companies that benefit from higher prices and may also benefit retailers and discounters. The opposite is often true for livestock feed manufacturers, which depend on agricultural commodities such as sugar, grains and high-protein crops. If these become more expensive, the costs of these businesses rise and their profit margins come under pressure. The higher costs may then be passed on by raising meat and dairy product prices.
As a result, El Niño creates losers as well as winners. Investors have not missed these dynamics. Some asset managers even put together baskets of potential ‘El Niño winners’, i.e. companies and sectors that could benefit from the economic consequences of this weather phenomenon. El Niño is not just a source of risk – it can create opportunities too. This difference is also found between regions. While droughts in parts of Asia may drive up the prices of specific agricultural commodities, more precipitation and better harvests in countries such as Brazil and Argentina may increase supply. Higher yields of crops such as soy, maize and wheat, for example, may partially slow down price rises elsewhere. In some regions, additional precipitation may also support hydropower production.
We may see shifts in the energy sector too. When drought puts pressure on hydropower production or hinders the operation of certain power plants, alternative energy sources such as solar and wind energy may gain ground in relative terms. The situation is similar for industrial raw materials or metals. Flooding in Chinese copper-mining regions disrupted copper production in the past, affecting the availability and price of a metal that is crucial for technology, electrification and the energy transition.
El Niño creates losers as well as winners. For investors, the real challenge is not predicting the next weather phenomenon, but understanding which companies are vulnerable to such disruptions and which can benefit from the solutions developed to address them.
Anthony Sandra and Dea Shehu, portfolio managers at KBC Asset Management
As a result, investors are less concerned with predicting the next weather phenomenon. The real challenge lies in understanding which companies are vulnerable to such disruptions and which can benefit from the solutions developed to address them.
The connections between the climate, the economy, sectors and markets are complex. That is why many investors believe added value lies not only in properly diversified assets, but also in the support of experts who help them assess risks, opportunities, and long-term trends. No one can predict the future – but if you’re well prepared, you won’t be caught off guard.
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This document is published by KBC Asset Management NV (KBC AM). The information and figures it contains are a snapshot, which may be changed without notice. The information provided offers no guarantee for the future. The information provided should not be regarded as investment advice or as an investment recommendation. Nothing in this document may be reproduced without the prior, express, written consent of KBC AM. This information is governed by the laws of Belgium and is subject to the exclusive jurisdiction of its courts.
