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(Bloomberg) — A bumper crop helped Luiz Inacio Lula da Silva defy pessimistic economic expectations in his first year back as Brazil’s president. The capricious Mother Nature will make repeating this feat more complicated in 2024.
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El Nino, the weather phenomenon with a history of disrupting agricultural powerhouses like Brazil, has returned with a vengeance in the South American summer, unleashing torrential rains in parts of the country and leaving others uncommonly dry. Prices of staples like rice and potatoes are soaring as a result, challenging both the central bank’s plans to continue the interest rate cuts Lula demanded and his campaign promises to deliver cheaper fare to everyday Brazilians.
“El Niño is worse than expected,” said Adriano Valladao, an economist at Banco Santander Brasil SA. “We expect higher inflation in January as the weather hits the most volatile foods. »
Annual inflation continued to decelerate to within the central bank’s range of targets in December, official knowledge showed last week. But food costs bucked the trend as the climate effects of El Niño, which have already disrupted production and led to spikes in parts of Asia, began to hit Brazil.
Potatoes, beans, rice and fruit all became more expensive amid high temperatures and heavy rains, while the overall cost of food at home — where effects are most pronounced — rose 1.3%, far faster than the 0.75% increase the month prior.
Economists are starting to revise growth estimates downward. And if the cyclical phenomenon proves as severe as it was nearly a decade ago, it could add as much as 0.8 percentage points to cumulative headline inflation totals for 2023 and 2024, most analysts estimated in a December central bank survey.
El Nino has caused the bank to increase its inflation estimates, Diogo Guillen, the monetary authority’s director of economic policy, said last week at a virtual event organized by JPMorgan Chase & Co.
But, he added, “it’s anything that adjusts everything. “
Prices go up, forecasts go down
In South America, Peru and Colombia face bigger El Nino dangers, thanks to potential impacts on hydropower, agriculture and fishing, said William Jackson, the chief emerging market economist at Capital Economics.
Argentina, on the other hand, is likely to enjoy some benefit from the phenomenon that may help alleviate record droughts that have devastated the economy.
“In terms of risks, Brazil is in the middle,” Jackson said.
Read more: El Niño triggers bumper harvest for Paraguayan soybean exporters
Some parts of Brazil may also receive a boost from El Nino-related storms. But the importance of agriculture to its economy means that even small harvest disruptions in other regions can pose sizable risks. Meteorologists see El Nino’s impact on South America beginning to weaken, but production shortages have caused Itau Unibanco SA to revise its agricultural GDP forecast for 2024 to 0.7%, down from a previous 2.5% estimate.
“In an extreme scenario,” Itau economist Natalia Cotarelli said, “we could see a negative agriculture GDP.”
Although El Niño remains mild, the agricultural sector is not expected to grow in 2024, according to Felippe Serigati, a researcher at the Center for Agribusiness Studies at the Getulio Vargas Foundation think tank.
Other effects of El Niño are already clearer. Extreme storms in southern Brazil, an agricultural area, caused flooding that delayed this year’s planting in Rio Grande do Sul, the country’s largest rice-producing state. As a result, wholesale rice costs increased by 40% in 2023, with costs increasing by almost 6% in December alone.
“The cost of this year’s harvest has been higher due to climatic challenges,” said Alexandre Velho, a farmer and president of Federarroz, an association of rice producers.
Prices of new tubers and legumes, such as potatoes, rose 8. 1% last month, according to official data, after poor harvests in the southern region. The price of potatoes increased by 19% in December.
Agricultural products will most likely become more expensive in the coming months, says Margarete Boteon, an economics professor at the University of Sao Paulo. The rainy weather has also hurt wheat harvests and will likely lead to a rise in flour prices, according to manufacturers’ organization Abitrigo. .
Read more: Brazil’s drought threatens to push up instant coffee prices
Brazil’s northern and central agricultural hubs, meanwhile, received less rain than expected, which has dented forecasts for soybeans, Brazil’s top agricultural export product. Producers in Mato Grosso, the largest source of soy, reported the need to replant 4% of the area, resulting in higher costs, according to state’s rural economy institute.
Oilseed costs are expected to rise, but many farmers now appear to be facing monetary losses, said Leonardo Alencar, an analyst at XP Inc. On the other hand, companies such as SLC Agricola SA have already revised their forecasts downwards.
Growing Risks
Brazilian policymakers may be comfortable with the fact that Latin America has so far noticed mild effects, said Jackson of Capital Economics.
El Niño kept Colombia’s central bank cautious for months as its main South American counterparts cut interest rates, but in December it cut for the first time in three years. El Niño hit Peru last year, helping to plunge its economy into recession. But its outlook has started to improve, and even if the dangers persist, the likelihood that its effects will be small or nonexistent in 2024 now increases, the central bank said last week.
In Asia, on the other hand, rising inflation has forced many financial governments to postpone the easing cycles they planned to launch in the second half of 2023.
Read more: Brazil’s export boom revives commodity bonanza
Still, El Niño highlights the growing threat of extreme weather to countries that rely heavily on agriculture to power their economies, especially as major weather events (coupled with unforeseen floods and droughts) become more frequent. This will likely make the weather an even more important factor. for inflation and economic performance.
“Longer-term risks stemming from weather updates will make extreme weather events more common and likely lead to higher and more volatile inflation,” Jackson said.
–With those of Clarice Couto, Oscar Medina, Jonathan Gilbert, Andrea Jaramillo and Marcelo Rochabrun.
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