Season has officially returned, but thankfully the US still hasn't experienced a hurricane since 2024.
Now with Tropical Storm Arthur hitting Texas last week, attention turning to a super El Nino season.
This occurs when sea surface temperatures climb more than 2 degrees above historical averages, and a super El Nino season could lead to commodity inflation, and this wouldn't be a single inflationary shock, with some warnings for double-digit G7 food inflation next year.
And some of the commodities most at risk include sugar, rice, and wheat, coffee and cocoa, as well as energy and metals.
Well joining me as we kick off a new trading week to break all of this down is Jeff Gitterman, managing director for Gitterman Asset Management.
Jeff, good morning.
Thank you so much for joining me.
Thanks for having me.
Well, when it comes to concerns regarding inflation, in particular food inflation, we know that geopolitics as well as extreme weather play into this calculus.
Here, so tell us about how El Nino could impact food prices.
So historically, El Nino has had this habit of making things wetter in the west and drier in the east.
It adds to more flooding across Europe.
It tends to add to more heat waves.
We're seeing right now over 100 °F temperature in Spain, in France, across Europe right now, and it's the second heat wave already in June for the month.
And what you typically see in an El Nino is that prices on food inflation can go up by as much as 50%.
Now it depends on other factors, and other factors are typically what you already stated geopolitical, but war.
These things add to the complexity of what an El Nino might do and when the El Nino actually hits and what's been done to prepare for the El Nino.
Typically what prep would be done is more fertilizer.
Things to offset the potential ravages of more droughts or more floods.
We've had fertilizer issues compounding because of the closing of the Strait of Hormuz.
What would help is to move production away from biofuels and more towards food production, but because of the lack of oil flowing through the Strait of Hormuz, we've had a huge demand for biofuels, so things like corn and sugar that go towards the production of biofuels are being taken away from food production.
And being driven to biofuels, so we kind of have the perfect setup where you know you don't have to talk about climate change here.
You can just talk about the combination of an El Nino, biofuel demand, and lack of fertilizer supply as like the triple threat of what can do what it can do to food prices over the next 6 to 12 months.
Yes, because we are coming off the G7 summit that took place in.
Europe last week and when we take a look at what the global central banks are saying right now, there's still concern about inflation moving forward despite some of the progress in terms of talks between US and Iran.
So when it comes to a second wave of food inflation, what options do these central banks actually have?
They don't have much in the case of a triple threat that we're discussing right now, and they've already released all the oil supplies that were built up.
So we're, you know, talking about most countries in Europe and the US at the lowest oil supplies that we've had historically over the last 40, 50 years.
So the, you know, levers that the banks can pull is really very narrow and very slim at this point.
Now, 150 years ago in the last really bad Super El Nino that we had, 50 million people died during that season, and some people are pointing to that in a very alarmist way.
We're not set up in.
Structured like we were back then and there were a lot of political mistakes that occurred 150 years ago.
There was a lot of grain depletion that occurred by different countries at that time, so backup supplies weren't there when needed.
Now we know it's coming, but look, you could know that a tornado's coming, there's not that much you can do about it.
There's not that much we can do about it except try to prepare, try to offer food credits, make sure that oil prices don't.
Have maybe taxes on it locally because you've got transportation costs that affect food, but when you take out transportation costs from food, you typically in in an El Nino can see up to a 50 to a doubling of food prices.
So we've got a rough 12 to 15 months to deal with based on what we're seeing and the fact that it's already been reported that the El Nino is here and ramping up pretty substantially.
Yes, and Jeff, here in the US it is summertime and that means we're having barbecues out there.
We're eating outside, but I do want to get your take on some of the most vulnerable food crops out there and your concerns because we're talking about rice, wheat, as well as sugar and cocoa.
So what worries you the most here?
I mean, sugar is the most risky because sugar really goes into everything that we produce and that demand for biofuels that we talked about, that demand is for sugar in a big way.
So we've got this pull on sugar.
We've already seen cocoa prices escalating across the Um, world because of rising droughts and heat waves, but I think the biggest impact we're going to see is sugar prices going into the El Nino because of that double kind of pull of the demand for it.
And as a country, we love our sugar in the United States for sure, so I, I think you'll see the most dramatic kind of impacts coming from that sector.
Yes, and finally, before I let you go, emerging markets have the highest food basket exposure here.
So when it comes to the most vulnerable markets out there, what are you concerned about?
Well, rice in Asia definitely.
So we're having dramatic issues with rice.
Rice is a staple in a lot of Asian countries.
That could be a dramatic effect on a lot of emerging market countries.
On food prices, they're already dealing with higher costs because of oil and what's going on with the war.
As of this weekend, we don't know if this war is over or not.
The strait is supposedly closed again, so we've got significant problems.
Those problems trickle down the most heavily to emerging market countries, especially ones that import pretty much everything.
China as an example imports.
The majority of their food supplies um are all coming from imports.
The US thankfully produces a lot of their own food and cans, so we're a little more immune than a lot of the emerging market countries or even the rest of the globe is.
Well, Jeff, we will have to leave it there.
Thank you so much for weighing in on this important topic as well as for sharing all of your insights.
Thanks for having me.
