It is increasingly believed that the El Nino weather phenomenon will hit Indonesia in the next couple of months. Over the past weeks reports already surfaced about unusual dry weather impacting negatively on harvests of agricultural commodities in parts of Southeast Asia. In Indonesia, dry weather traditionally lasts from May to August. However, El Nino may cause warmer conditions and extending these into September hence affecting output in the peak harvest season. This will cut agricultural output and provide inflationary pressure.
The El Nino weather phenomenon refers to periodical warm ocean water temperatures off the western coast of South America that can cause climatic changes across the Pacific Ocean. On average this phenomenon occurs once every five years; sometimes passing by nearly unnoticeable, but on other occasions causing severe droughts or flooding in several parts of the world. Southeast Asia is typically plagued by droughts during an El Nino leading to weak harvests of agricultural commodities and forest fires. A weak harvest implies price hikes and in countries such as Indonesia this can cause a higher poverty rate as a large portion of the Indonesian population is near poor.
Once every twenty years, the impact of El Nino is particularly strong. The last time we saw such an extra strong El Nino cycle was in the 1997-1998 period resulting in the deaths of around 2000 people and damages worth of tens of billions US dollars worldwide. Many institutions expected to see a severe El Nino in 2014. However, this turned to be false alarm although we did see a late appearance of the rainy season at the end of 2014 in Indonesia. This late rainy season curtailed the country’s rice production and led to a spike in inflation.
Indonesia’s agricultural output that may be affected include rice, palm oil, coffee, corn and cassava. Rice is a key commodity for Indonesia as it is the staple for nearly all Indonesian households and solid rice output is important to combat poverty. However, domestic rice production can barely meet domestic demand, even in optimal climate conditions. The US Department of Agriculture predicts that Indonesia needs to import at least 1.5 million tons of rice in 2015 as there are no other short-term solutions. However, due to the weak rupiah this may bring imported inflation.
Meanwhile, the Association of Indonesian Coffee Exporters and Industries (AEKI) estimates that Indonesian coffee output will be between 600,000-650,000 tons in 2015, lower than the institution’s earlier forecast of 650,000-700,000 tons and below production realization last year of 711,513 tons. Other analysts or industry groups expect that the El Nino phenomenon will reduce AEKI’s forecast by about 50,000 tons. Indonesia is the world’s third-largest robusta bean producer and according to a HSBC report robusta coffee is highly vulnerable to a lack of rainfall. In Vietnam, the world’s largest robusta bean grower, dry weather has already triggered concerns about coffee output as more hot spells are expected in June and July.