El Niño's Hidden Threat: How Oil Prices and Policy Action Will Shape Asia's Food Inflation

Asia's food prices may be more affected by El Niño than rainfall alone. The region has weathered seven episodes in the past 25 years, with mild-to-moderate ones shaving around 0.2% off agricultural output growth and lifting food inflation by 0.6%. However, during severe episodes, the relationship between El Niño and food prices breaks down, and despite sharper crop losses, inflation has actually fallen.

The key factors explaining this paradox are oil prices, resilience, and policy action. When oil prices remain moderate during an El Niño episode, as in 2015-16 and potentially 2023-24, food inflation is relatively contained. Improved irrigation, drought-resistant seeds, and diversification into non-farm activities have also reduced rainfall sensitivity.

Governments now preemptively release strategic grain reserves, enforce price controls, and curb hoarding to mitigate the effects of El Niño. However, this raises concerns about moral hazard and market distortions in the long term.