In an effort to curb rising domestic food prices and ensure availability, India has banned rice exports, fanning the flames of global food inflation concerns after Russia blocked Ukraine shipments.
Prices of wheat and other grains soared this week after Russia’s defence ministry said that ships heading to Ukrainian ports would be considered as potentially carrying military cargo, intensifying existing worries as a severe dry spell continues in key US growing regions and recent warnings about the likelihood of an El Niño weather event in the second half.
India's Ministry of Consumer Affairs announced the ban on non-basmati white rice, noting that domestic prices have leapt 11.5% as exports volumes rose 35% between April and June.
India is the world’s biggest exporter of rice, accounting for about 40% of global exports.
It was reported that the potential consequences of a severe El Niño event on India’s economy was part of the government's reasoning.
A ban on rice exports is not unprecedented, with similar curbs between 2008 and 2011.
As such the leading producer in the globe, an export ban would have "severe repercussions for global rice prices, and India would risk the ire of the international community", said Shilan Shah, emerging markets economist at Capital Economics.
He said a ban "would probably help to cool domestic prices at a politically expedient time (campaigning for the general election in 2024 will start over the next couple of months)."
Commodity prices already affected
Wheat prices climbed over 10% on Wednesday and Thursday but have retreated today.
Growing warnings about the potential for a strong El Nino weather pattern are thought to be behind various soft commodity prices rising to long-term highs.
Robusta coffee futures hitting their highest level since the contract started in 2008, sugar prices rising appreciably since the start of April to around their highest level in over a decade, and cocoa trading around a seven-year high.
This month there were predictions of a 90% chance of El Niño will continue over the winter, increasing the risk of heavy rainfall and droughts in certain parts of the world (in Australia, it raises the chances of droughts while in the southern US it can lead to chances of flooding).
In June the Climate Prediction Center said there was a 56% chance that it will be a strong El Niño in the November-January period, which would only be the third time in the 21st century it has happened.
Worries if El Niño strengthens
"El Niño events normally occur every few years, but what's concerning are the widespread predictions that it will strengthen further," said Deutsche Bank macro strategist Henry Allen in a note last month.
"This could have a particularly negative effect on emerging markets, where it's regularly the case that food makes up at least a third of consumer expenditure. Their geographic position also leaves them more exposed to climatic changes such as flooding, which an El Nino event makes more likely," said Allen.
Higher commodity prices lead to inflationary pressures on food.
"That's especially concerning in today's context, since we are already experiencing a period of above-target inflation in many countries, which has been propelled higher by a series of supply-side shocks," said Allen.
"The risk is that further shocks in turn lead to inflation expectations moving permanently higher, making the job of central banks even more difficult."
A similar phenomenon in the 1970s precluded the first oil shock in late-1973, with an El Nino event in 1972-73 added to inflationary pressures
"So with specific commodity prices already increasing over the last couple of months, this is something that will need to be closely followed to ensure it doesn't keep inflation entrenched at high levels," Allen said.
Jennifer McKeown at Capital Economics said until there is a better idea how strong the El Niño will be, her team is not yet changing it commodity price forecasts.
"But we have stressed that there are upside risks to prices, particularly of sugar, cocoa, coffee and rice," she said in a note last week.
"However, previous experience suggests that there is only a limited threat to headline CPI inflation in advanced economies."
Food accounts for 12% of CPI baskets of advanced economies on average, with the sugar and sweets, coffee and rice components combined making up around 2% of the basket.
She noted that overall food inflation rose by one percentage point as sugar and cocoa prices ramped up during the strong El Niño event in 1997/1998, adding 0.12ppts to the average headline CPI rate in the OECD.
"So this can perhaps be thought of as a 'strong El Niño' scenario."