The El Niño effect on food and agriculture

18 October 2017

From the rising price of salmon to bicycle part shortages, past El Niños have caused wide-ranging – and surprising – impacts. But the ability to understand and protect against them is growing.

Caused by warmer waters moving across the Pacific and interacting with the atmosphere, El Niños occur on average every five years.

Lasting a few months, the phenomenon results in above average temperatures in the central and eastern equatorial Pacific.

Strong El Niños cause everything from flooding to droughts, bringing widespread disruption to agriculture.

Disruption to supply chains

In 2010, a moderately strong El Niño helped push up prices of grain – among the causes of the Arab Spring that brought, along with conflict, widespread disruption to supply chains of businesses around the world (including bicycle retailer Halfords).

The most recent El Niño, over the winter of 2015 and 2016, was among the strongest on record. In many places the results were catastrophic, says Kimberly Roberts, Vice President and Meteorologist in the Catastrophe Risk Management Services business of JLT Re.

"It caused abnormal weather conditions across the entire globe, and a lot of them in key agricultural areas," she says.

"Whether it’s unexpected rainfall or lack of it, or a change in air or water temperatures – all can have an adverse effect.

Agriculture relies on a normal range of expected temperature or precipitation patterns. When you fall outside them, it can really disrupt production."

As Simon Lusher, Head of Food and Agri at JLT Specialty, puts it: "In certain places it causes severe weather and in other places it causes unseasonably mild weather. Both of them are problems for the agriculture industry."

In Chile, the world's second- biggest salmon exporter, warmer waters in 2015 and 2016 promoted the growth of algae that remove oxygen from waters through photosynthesis and in sufficient amounts to result in oxygen-free dead zones.

The unprecedented algal blooms killed millions of fish – about a fifth of the country's production, worth $800 million. Only about $150 million was insured.

In Mexico, meanwhile, tuna off the Baja coast left their normal habitats and travelled north – a boom to fisheries in California, but devastating for the economy further south.

The effects of the El Niño are also apparent on land, and are continuing to be felt this year, being blamed for much of the recent rainfall and flooding that's wreaked havoc in Peru.

Ten times the usual rainfall has not only killed dozens of people and made more than 70,000 homeless, but caused widespread disruption to supply chains owing to flooding, mudslides and blocked roads.

"It's obviously a huge problem for the farmers affected, but it also impacts the commodity traders, food producers and supermarkets down the line," says Lusher.

"We're no longer used to seasonal eating; we've come to expect to be able to buy a wide range of foods throughout the year."

Meeting demand in food and agri

The ability of farmers and producers to meet that demand may be even more challenging in future, with some suggesting climate change may bring stronger El Niños in future.

"It's a huge area of active research," says Roberts. It is an area where help is increasing, however.

Traditionally, the models insurers and reinsurers used for assessing the risk of natural catastrophes have focused on large-scale events such as earthquakes and hurricanes, according to Keith Leung, Head of Catastrophe Modelling at JLT Re in London.

"While catastrophe modelling is still an evolving science, the analysis of how insured assets (buildings) respond to external forces generated by hurricanes and earthquakes and therefore how that translates into financial losses is reasonably well understood.

This type of modelling has become an industry-standard way of measuring the risk of natural hazards."

"The effect of El Niño, by contrast, is much more complex, far-reaching and yet with highly localised consequences.

"It sits in this awkward space between short- term weather forecasts and the current incarnations of catastrophe models," says Leung.

On the other hand, he says, despite the fact that the current catastrophe models do not explicitly quantify the frequency and severity of El Niño-related phenomena, the general impacts as well as its counterpart, La Niña, are actually fairly well known and accepted by the scientific community: "For instance, we know El Niño is associated with reduced wind shear in the Gulf and a reduced likelihood of the formation of hurricanes.

"In Australia, El Niño is associated with a reduction in rainfall in the eastern part of the country, which brings an increased risk of bushfires, heatwaves, and droughts in that region. "That awareness is really useful to businesses."

Risk transfer solutions

There are two key ways a broker can help. One is an awareness of the risk transfer solution available. Even in developed nations, agricultural insurance penetration is low, says Roberts.

In the developing world, it is even scarcer. Partly this can be addressed with education, and increasing understanding of the risks. Partly it’s also likely to be addressed by new solutions.

"The industry is increasingly innovative," says Roberts. "Companies like JLT's Capital Markets business work with a range of corporations and others to craft solutions to manage their weather risks."

Many of the alternative risk transfer products are based on weather indexes, using data from weather stations – once rainfall or temperatures in a particular area reach a threshold that would damage production, for example, they pay out.

These products are both helping make risk transfer more affordable and enabling producers to tailor cover more closely to the particular factors that most impact their business.

The other area brokers can help is to combine the long-term perspective on weather trends, drawing on more than a century of data, with an understanding of a business’s specific risks and needs over the coming year. It's particularly helpful when considering supply chain risk, according to Lusher.

"What we're seeing with weather patterns at the moment is that the impact can be global. Businesses need to be mapping that supply chain to where the risks are so they can make appropriate decisions," he says.

Part of his role, he adds, is to encourage conversations between those in the organisation with a good understanding of the supply chain and the risk managers attempting to mitigate the potential impacts of weather events.

"It gives you options," says Lusher. "If you have an understanding of the supply chain, you can make contingency arrangements. With the increasing impact we’re seeing from all kinds of weather, every business should be looking at where products come from and where their alternative sources are."

For more information please contact Simon Lusher, Head of Food & Agri on +44 20 7459 5550 or email simon_lusher@jltgroup.com