El Nino weather menace looms for frail economies

NEW YORK, July 6 Mon Jul 6, 2009 6:00am BST

NEW YORK, July 6 (Reuters) - A nascent El Nino weather cycle threatens to wreak more economic havoc and disrupt raw material production across a wide swath of the world, evoking memories of the killer edition of 1998.

The timing could not be worse. This El Nino appears to be developing as the world is struggling to emerge from the worst economic conditions since the Great Depression. Eleven years ago, a damaging El Nino occurred in the middle of the Asian financial crisis which roiled financial markets.

"El Nino is a little bit like recession: you are in it before you can say you have one. If it continues as it is now, the historians will say the El Nino started in May," said David Jones, head of climate analysis in Australia's Bureau of Meteorology. Jones said they could declare an El Nino in weeks.

During El Nino, an abnormal warming of the waters of the equatorial Pacific unhinges weather patterns in the Asia-Pacific region and beyond. A La Nina weather pattern, in which waters cool, was in place last year.

In 1998, El Nino-related storms, floods, tornadoes and mudslides killed more than 2,000 people and caused billions of dollars in damage to crops, infrastructure and mines.

Michelle L'Heureux, head of the U.S. Climate Prediction Center which tracks El Nino, said this version may not approach the one in 1998, the strongest weather anomaly in 150 years. The CPC is an office under the U.S. National Oceanic Atmospheric Administration.

If the anomaly does recur with severity, drought in Asia could lift grain prices, which are already near historic levels due to supply shortages, while storms that would disrupt crude production in the Gulf of Mexico may be minimized.

Mike Palmerino, U.S. agricultural meteorologist with DTN Meteorlogix, added: "This one has a little more going for it. But a year ago at this time it looked like we were building toward an El Nino and everything just totally fell apart toward the end of the summer, where all the Pacific circulation patterns changed and we actually slipped back into a La Nina."

COMMODITIES WEATHER WATCH

Some forecasters fret that an early sign of this El Nino is the weak annual monsoon plaguing India, one of the world's biggest producers and consumers of everything from sugar to soybeans.

The monsoon rains are the lifeblood for farmers in India. Its faltering sugar crop is a prime reason why sugar prices are at their highest levels in three years.

China typically turns to South America for soybeans during the U.S. growing season. But the 2009 crops from Brazil and Argentina are suffering from drought and U.S. soybean stocks are at a 32-year low -- less than two weeks of normal commercial supply.

Shawn McCambridge, grains analyst with Prudential Bache Commodities in Chicago, said the El Nino could "dry out the second half of 2009 in Australia and it can also affect South American production.

"It's developing a little too late to really have much of an impact on the Northern Hemisphere, but the concern would be in the Southern Hemisphere (crops)," he said.

Indonesia, one of the biggest producers of palm oil and a large consumer of sugar and rice, faces drought.

Australia is one of the world's biggest wheat producers and has barely recovered from the worst drought in 100 years which hit a few years ago.

Rob Imray, general manager of grain trading and agricultural risk management firm Farmarco, said the Australian wheat crop is off to a good start but the southern areas could suffer if no rain arrives in August and September.

EFFECT ON METALS?

Severe floods may disrupt mining operations in Chile, the world's biggest copper producer, and Peru, among others.

India is the world's biggest gold buyer when farmers, whose annual income is tied to the monsoon, buy the metal for the festival of lights celebrating the end of their harvest in November.

Still, Andrew Montano, a director at bullion dealer ScotiaMocatta in Toronto, said, "the bulk of the demand is coming from international investors, more so than from the Indian subcontinent."

In the United States, El Nino could funnel wind shear into the Atlantic basin and hinder storm formation during the annual hurricane season.

Vernon Kousky, former head of the CPC, said there could "be a suppression of Atlantic hurricane activity, provided that further intensification of El Nino occurs during the next couple of months."

A strong El Nino could lead to a mild winter in the Northeast, the world's biggest heating-oil market. The snow pack in the Western United States may also suffer and affect hydroelectric power generation.

But Stephen Schork, editor of The Schork Report in Pennsylvania, said the weak economy would mute the weather phenomenon's impact on energy markets.

"There's just a lot of supply out there," he said. (Additional reporting by Bruce Hextall and Michael Perry in Sydney, Frank Tang and Rebekah Kebede in New York, Christine Stebbins in Chicago, and Naveen Thukral in Singapore; Editing by Alden Bentley, Christian Wiessner and Matthew Lewis)