El Niño and Australian Wheat

El Niño Characteristics

El Niños are extremely complicated events. The first stage is somewhat well defined, with the waters off the Western coast of South America becoming warm. According to the United States (US) National Oceanic and Atmospheric Administration (NOAA), the equatorial Pacific Ocean must record three month averaged warming of at least 0.5°C in order for the event to classify as an El Niño. The warmer water causes changes in air pressure, which can then weaken or shift trade winds. These shifts in water temperature and air pressure cause changes in weather patterns around the world.

El Niño events are irregular in terms of their intensities, frequencies, and in the nature of their impact in different places. In some regions an El Niño can be a boon, providing extra rainfall that supports crop growth in places such as Kansas and many parts of Russia. In other places, like Eastern Australia, the shifting weather can be devastating, driving up temperatures and forcing drier conditions.

Scientists have confirmed that the present El Niño will be a strong one, with a greater than 80 percent chance that conditions persist into the spring of 2016. NOAA has noted higher than normal temperatures over the Pacific Ocean and already observed shifting wind patterns. Many people, companies, and countries are digging in and bracing themselves for the impact.

A Crop of Corn

Like any weather event, El Niño affects the most sensitive of crops first. And unfortunately wheat, one of the world’s most widely-traded crops for which global demand is growing at staggering rates, is one such sensitive crop. Most production of the grain occurs in the European Union (EU), China, India, and the US, and most exports of the crop come from the US, EU, Canada, Russia, and Australia. The wide geographic distribution of wheat production, and the variability of the impact of any given El Niño, means that predicting the effect of any such event is very complicated.

In order to fare well, wheat needs a mean growing season temperature within the 15° to 25°C range. Crop yields start to decrease when average temperatures exceed 28° C and the number of extreme heat days (>34°C) become frequent. Rainfall is also important—wheat cannot withstand very dry conditions, but this risk can be mitigated by the use of irrigation.

In places like Eastern Australia, Northern Brazil, and parts of East Africa, El Niños tend to bring about more arid conditions, which can be devastating to agriculture and especially to wheat production. While it’s still too early to tell what the impact of the event might be to global wheat production, a reduction in any of the top exporters can have major, broad repercussions given that the grain provides approximately 20 percent of total dietary calories and proteins to the global populace.

Australian Wheat

Wheat is grown on slightly more than half of all Australian cropland and is the country’s largest soft commodity export. Although Australian farmers are still in the midst of their sowing season, the country’s government has already revised downward its production estimates for this year from 24.4 million tonnes to 23.6 million tonnes. But other experts, including analysts from National Australia Bank, maintain that the government’s figures are overly optimistic, claiming that output will more than likely be closer to 20 million tonnes. While there is some level of certainty that Australian wheat output this year will not be optimal, it’s still too early to say what this output will actually be. There is the possibility that production will be even lower than the National Australia Bank’s estimate.

Over the past several decades, El Niños have repeatedly wreaked havoc on Australian agriculture. Interestingly, however, those events that are considered “strong”, including the present El Niño, do not necessarily have a huge impact on the country’s agricultural production.

For example, the infamous 1997-1998 El Niño actually had a relatively minimal effect on Australian crop production, while the “milder” 2002-2003 event proved devastating. In terms of wheat specifically, the 1997-1998 event drove down production by around 10 percent, while the 2002-2003 event, which sparked widespread drought, more than halved production from 24 million tonnes the previous year to 10 million tonnes.

Australia is not a top global wheat producer, but its small population means that consumption is only around seven million tonnes of the grain each year, freeing up millions of tonnes for export. While Australia is responsible for less than four percent of global wheat production, the country accounts for nearly 11 percent of all globally exported wheat. Most of Australia’s wheat is grown in the Southern half of the country, where rainfall is greatest in the winter months, overlapping with wheat’s main growing season. The states of Western Australia and New South Wales (in the east) are the largest growers of the grain, but South Australia, Victoria, and Queensland are also significant wheat producers. History indicates that El Niños tend to have a stronger effect on Eastern Australia, with the events causing both decreased rainfall and higher temperatures. And while the impact of El Niños on Western Australia tends to be less severe, it is not negligible.

The Spillover to Foreign Markets

Declines in Australian wheat output are most likely to impact Asian markets. The country’s wheat is exported throughout Asia, with 30 percent going to Southeast Asia, 19 percent to Japan, and 24 percent to other Asian countries.

Indonesia, the world’s second biggest wheat importer, is by far the largest market for Australian wheat. Despite Indonesia’s growing appetite for wheat, the country’s hot and humid climate make it unsuitable for wheat cultivation, forcing the country to rely on imports of the grain. As a result, the country imported about seven million tonnes of the grain in 2014, four million of which came from Australia. And in years when Australian production has fallen, like it did as a result of the 2006-2007 El Niño-driven drought, Indonesia was forced to increase its imports from North America and Russia. If Australian production falls substantially in 2015/16, Indonesia, as well as fellow importers of Australian wheat, will have to look elsewhere to meet demand.

The cost-competitive nature of Australian wheat for Indonesia means that the country is likely to continue its imports of the grain, especially given the fact that Australian standard white wheat is the variety preferred by the noodle industry. This use for Australian wheat is vital considering that the demand for instant noodles in China, Indonesia, Japan, India, and Vietnam rose from 69.7 to 73.6 billion packets between 2010 and 2014, according to the World Instant Noodles Association. Furthermore, the growth of middle classes across the region is driving up the demand for wheat-based breads. By 2020, per capita wheat consumption in South East Asia is expected to increase by 40 percent.

However, the ability of Australia to satisfy and capitalize on the growing demand for wheat is uncertain. While wheat yields are strong and relatively predictable in many major producing countries, the Australian situation is less predictable. Because El Niños are expected to become more frequent, Australia’s ability to consistently produce a significant amount of wheat will diminish, while the ability to do so by some of its competitors that benefit from El Niños, like Russia, may rise. The future of Australian wheat, to put it lightly, is precarious.

Looking into the Future

It seems that the only thing certain about the impact of an El Niño is its variation. Indeed, the massive variability in weather patterns resulting from El Niños has sparked a scientific debate on how the events are defined, and whether the term “El Niño” is too general. The uncertainties surrounding El Niños will only become more worrisome as such events grow more frequent in the coming decades.