Companies Are Bracing Themselves For El Niño’s Ripple Effects

People wade through a flooded road caused by monsoon rains, in Apalit, Pampanga, Philippines, on Aug. 20. —Daniel Ceng/Anadolu—Getty Images

The warnings from meteorologists have been growing slowly but steadily in recent months: the most severe El Niño on record may be coming soon. Record-breaking temperatures and a slew of extreme weather events are likely to follow.

For companies and investors, alarm bells are already sounding. Hundreds of publicly traded companies—particularly in the food and chemicals sectors—have used earnings calls in recent months to outline their contingency planning. And banks have warned about the possibility of a supply shock that drives up prices as extreme weather disrupts production chains.

In other words, the potential effects of El Niño over the coming year are both local and specific to companies and their operations, and cumulative across the economy.

Unlike many phenomena in our climate-changed world, El Niño isn’t new or unfamiliar to most decision makers. Past cycles in the 1970s and 1990s have wrought enough damage that supply chain planners know to watch out. But this El Niño will inevitably be different.

For one, it’s happening against the backdrop of a world that has already warmed roughly 1.5°C since the Industrial Revolution. And, second, modelers have observed an especially significant difference between recent sea-surface temperatures and the historical averages, an indicator of an especially strong El Niño.

A typical El Niño cycle lasts less than a year, but the economic effects may extend far longer. An initial shock of crops destroyed by heavy rain, for example, would harm farm economies immediately while disrupting global supplies for several seasons. A report from the European Central Bank found that a strong El Niño could raise global food commodity prices by as much as 9% within 16 months of onset and last for years longer. Factory flooding wouldn’t just create immediate disaster relief challenges but take years to rebuild.

“When we think about pricing and when we think about other actions to protect our margins, we don’t look at it specific to weather patterns,” says Richard Shin, CFO at the Philippines-based fast food chain company Jollibee Group, on an earnings call. “We look at it right across the board, what we call inflation and what we call supply chain disruptions or limitations.”

All told, the economic hit could be enormous. A 2023 paper published in the journal Science found that the 1982-1983 El Niño drove more than $4 trillion in global income losses. In the 1997-98 cycle, that total hit $5.7 trillion.

With El Niño, as with climate change, the relationship between a stronger phenomenon and economic damages isn’t linear. A worse El Niño may lead to much, much worse economic outcomes.

Indexed and credited by AIPROPX. Originating outlet: Time. Open at source →