La Niña, the black swan

This week’s disastrous floods in Queensland have tragically claimed many lives in addition to leaving thousands homeless and without businesses to return to, but the biggest cost economically may be felt abroad. I’m not talking about reinsurance here - though that is indeed an issue considering the estimated $5 billion damages bill - but about the disaster’s ramifications for the price of food and the price of energy: two issues that I see as defining for 2011.

Queensland’s floods may also be just the tip of the iceberg, so to speak, of a much larger weather phenomena that could in turn further exacerbate food and fuel inflation: a ‘super La Niña’ of a size and scope which, according to US meteorologist Art Horn, rivals the La Niña pattern of 1973-4, when Queensland and its capital city Brisbane last sank under a flood of today’s magnitude.

Horn's arguments on the current La Niña bear careful consideration not just because of the potential ramifications for global markets, but because they are being echoed by others from Neville Nicholls of the Australian Meteorological and Oceanographic Society to the always thought provoking John Clemmow of UBS, who discusses the Australian Bureau of Meteorology’s latest ENSO (El Nino Southern Oscillation)report. And, as Adam Mann discusses in Nature, conditions are likely to remain abnormally cool and wet in Australia, while windy and dangerous in North America’s hurricane belt for some months yet. 

That doesn’t bode well for coal, of which Australia is the top global exporter, or for oil, of which a significant share comes from the hurricane-prone Gulf of Mexico and Caribbean.

When we consider the impact of other previous super La Niñas, whether in 1955, when epic floods stormed the New South Wales, 1917, when the Ohio River froze over and the seeds of the 1918 pandemic were arguably sown, or as recently as 2007-8, when food prices reached previous records, the situation bodes even less well.

Simply put, a glance at La Niña’s previous appearances shows up a pattern of dramatic climactic risk, especially at a time when food and fuel are already commanding high prices. Figures from the UN’s Food and Agriculture Organisation, for instance, show that prices of staples are already higher than the peak in 2008, while both Nicolas Sarkozy as chair of the G-20, and World Bank president Robert Zoellick have put food prices at the top of the agenda. 

Brent crude, meanwhile, is nearing $US100 a barrel on lower US stockpiles, a leaking Trans-Alaskan pipeline and unsure political situations in Sudan, Belarus and Lebanon.

And these are merely the supply-side issues of a weather phenomenon that cuts both ways. In terms of example, Bloomberg reports that heating oil futures are at a 27-month high on snowstorms in the US, while in China what Xinhua describes as the most extreme weather in ten years is adding impetus for further food price controls. 

In India, meanwhile, there’s an onion crisis, Indonesia’s government is encouraging citizens to grow their own food, South Korea has released emergency supplies and deadly riots have broken out across the Maghreb.

But the issues, as it were, keep rolling in. The US Department of Agriculture has just released data reducing soybean and corn estimates, sending futures in those products to 30-month highs. 

No doubt the Ponzi scheme of derivative trading, much of it cornered, is adding to the volatility of these commodities.