In the wake of climate change, we are increasingly faced with hurricanes, droughts, floods and other extreme weather events that can affect the economy. Droughts lead to reduced agricultural yields, which can result in higher food and agricultural commodity prices on global markets. A reduction in the amount of available food can in turn lead to food shortages, especially in Asian developing countries, i.e. India, among others. For this economy, reduced revenues from food production could also be crucial, given that as much as 16.8% of the workforce there works in agriculture, against an average of 5.8% for the region as a whole (World Bank data). How might this situation affect financial markets?
Pessimistic forecasts from meteorologists
According to long-term forecasts from meteorologists, the dry season this year will last longer than usual and be accompanied by even less rain than usual. Temperatures routinely exceed 40 degrees Celsius in Thailand, Laos and Cambodia. As a result, there are local shortages of water and electricity availability. Climate historian Maximiliano Herrera has called the current climatic conditions "the worst heatwave in Asian history". According to Herrera, the season of crop and forest spontaneous combustion usually lasts about two months and ends with the arrival of the rainy season. Cambodia's weather forecasts, however, call for an extension of the heatwave until mid-May, with less rainfall than in 2022. These forecasts can be applied equally to southern Vietnam, Laos, Thailand and Myanmar and, if correct, a potential drought could have a devastating impact on the poorer economies of the region.
Source: https://en.sat24.com/en/forecastimages/azie/forecasttemp
Agricultural products at risk of crop failure
Agricultural products, including cereal grains, coffee and palm oil, among others, are exposed to significant impacts from drought. Wheat prices appear particularly vulnerable to climate change, with China and India ranking 1st and 3rd globally in wheat production in 2020, accounting for 17 and 12.5% of global production respectively. A crop failure could lead to shortages and drastically drive up wheat prices. Nevertheless, there is currently an oversupply in the markets for products such as maize, sunflower and wheat. This is due to the unlocking of more than 23 million tonnes of grain and food products from Ukraine. The war in that country is bringing agricultural markets down.
Source: https://worldpopulationreview.com/country-rankings/wheat-production-by-country
Source: Tradingview
Possible negative consequences for developing countries
The poorer countries of the region, which at the same time have a high proportion of people working in agriculture, appear to be particularly vulnerable to possible crop failure. Such countries in Southeast Asia include.
Myanmar (23%), Cambodia (22%) or India (17%). A crop failure in these countries could even lead to famines and a significant slowdown due to the need for support and subsidy programmes for the citizens of these countries.
Źródło: https://data.worldbank.org/indicator/NV.AGR.TOTL.ZS?type=shaded&view=map
Grzegorz Dróżdż, CAI, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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