impact of el nino raises concerns in asia

By V. Phani Kumar, MarketWatch

HONG KONG (MarketWatch) -- The El Niño weather effect currently developing could mean fewer storms this year in the Atlantic, but in Asia it's raising concerns about likely agricultural inflation and the fallout for related stocks.

"A significant El Niño would negatively impact agricultural output in much of the Southern Hemisphere, setting in motion a chain reaction of higher food prices as the world economy recovers," Deutsche Bank analysts Niklas Olausson and Xun-Ming Ip wrote in a report released Friday.

"Exporters Malaysia and Indonesia are potential beneficiaries in Asia. Importers China and India face higher food bills and uncertain agricultural prospects," they said.

The El Niño effect causes dry weather conditions in some areas due to warmer-than-normal waters along the equatorial central and eastern Pacific Ocean.

Deutsche Bank wrote that the plantation sector will be the focus as the El Niño effect develops, adding the brokerage has upgraded plantation stocks in Malaysia and Singapore.

It added that an increase in crop prices should boost demand for fertilizers and agricultural chemicals in the medium term, while regional food companies and tire manufacturers in South Korea could be negatively affected.

Referring to palm oil companies, they said: "While El Niño should cause oil palm yields to decline, the positive effect dominates."

The Deutsche Bank report came after Australia's Bureau of Meteorology said earlier this week that the odds of an El Niño "are now thought to be above 50%, which is more than double the normal risk of an El Niño in any year."

Separately, the U.S. National Oceanic and Atmospheric Administration said Thursday the El Niño continues to develop.

"El Niño produces stronger upper-level westerly winds over the Caribbean Sea and tropical Atlantic Ocean, which help to reduce hurricane activity by blowing away the tops of growing thunderstorm clouds that would normally lead to tropical storms," said Gerry Bell, lead seasonal hurricane forecaster at the NOAA's Climate Prediction Center.

Merrill Lynch economist John Rothfield wrote in a report Friday that Australian farm output is less than 3% of the country's economy, "but weather-related variations in output can be large enough to impact GDP and income materially."

"The aggregate economic impact of El Niño is that it is a supply event, not a demand event, thus unfavorably impacting the growth/inflation trade-off and requiring that domestic consumption comes from costly imports," Rothfield wrote