El Niño is a business risk: What Australian companies should be watching

El Niño is usually discussed as a weather story. Australian businesses should also regard it as an economic one.

Changes in rainfall and temperature can move through the economy in ways that are not immediately obvious.

Agricultural production can change.

Food prices can move.

Electricity consumption can rise.

Insurance losses can increase.

Transport can be interrupted by fires.

Tourism patterns can shift.

Businesses that never consider themselves weather-dependent can discover that their suppliers, customers or employees certainly are.

What is changing?

El Niño is the warm phase of the Pacific climate cycle known as ENSO.

Changes in Pacific Ocean temperatures and trade winds alter atmospheric circulation across the region.

For Australia, El Niño historically increases the likelihood of reduced rainfall across significant areas of eastern and northern Australia and warmer daytime temperatures across much of the country.

That does not guarantee drought.

From a business perspective, however, certainty is not required before a risk deserves attention.

Agriculture is the obvious starting point

The first-order commercial consequences occur in agriculture.

Lower rainfall can reduce crop yields and pasture production.

That affects farmers directly.

The second-order consequences spread much further.

Grain processors, livestock businesses, transport operators, fertiliser suppliers, machinery dealers, rural retailers, banks and exporters can all experience changes in activity.

Agriculture remains deeply connected to Australia's broader economy.

Food businesses should pay attention

If agricultural production falls sufficiently, wholesale prices can rise.

That can eventually reach supermarkets, restaurants, cafes and food manufacturers.

Not every commodity will move in the same direction.

Australia participates in international markets and prices are influenced by global production, currencies, freight and demand as well as domestic weather.

Nevertheless, weather remains one of the fundamental variables determining food costs.

Businesses operating on narrow margins need to understand that exposure.

Electricity could become more expensive to use

El Niño is associated with hotter daytime temperatures across much of Australia.

Hot weather increases air-conditioning demand.

For offices this may be manageable.

For businesses with substantial cooling requirements, the financial effect can be considerably larger.

Supermarkets, cold-storage facilities, hotels, shopping centres, restaurants, data centres and manufacturers can all experience increased electricity consumption.

Businesses should distinguish between the electricity price and the electricity bill.

Even if the unit price remains unchanged, consuming considerably more electricity increases costs.

Insurance enters the equation

Weather affects insurance in complicated ways.

El Niño can increase bushfire exposure in parts of Australia while potentially reducing some other weather risks.

Insurers price risk across long periods rather than responding to one climate event alone.

Nevertheless, repeated natural disasters ultimately influence premiums, deductibles, underwriting standards and the availability of cover.

Businesses in fire-prone locations should understand their insurance arrangements before they need them.

Supply chains can be affected

Australian supply chains are vulnerable to weather disruption because of the distances involved.

Bushfires can close highways and rail corridors.

Extreme heat can affect transport and infrastructure.

Agricultural shortages can alter freight volumes.

Water restrictions can affect particular industrial operations.

Businesses increasingly conduct cyber-risk and financial-risk assessments.

Climate and weather exposure deserves a place alongside them.

Tourism produces winners and losers

A dry, warm period can be commercially beneficial for some tourism businesses.

Beach destinations, outdoor dining venues and particular attractions may benefit from extended fine weather.

But extreme heat and bushfires can reverse that advantage rapidly.

Regional tourism operators can be especially vulnerable to perceptions.

Images of a fire hundreds of kilometres away can affect bookings across an entire region.

Tourism businesses therefore need communication plans as well as emergency plans.

The consumer can eventually feel it

If food, electricity and insurance costs rise simultaneously, households have less discretionary income.

That matters to retailers and hospitality businesses.

Weather can therefore affect a business without ever physically touching its premises.

A consumer facing higher grocery, electricity and insurance bills has less money available for restaurants, clothing, entertainment and discretionary purchases.

That is how a climate event can become a retail event.

Inflation is the bigger economic question

A substantial weather-related increase in food or energy prices can complicate Australia's inflation outlook.

Central banks generally distinguish between temporary supply shocks and persistent inflation.

Households do not enjoy that luxury.

They experience the actual bill.

If enough essential costs rise simultaneously, consumer confidence and spending can weaken.

That makes El Niño relevant to businesses far beyond agriculture.

What should businesses do?

There is no reason for businesses to make dramatic decisions simply because El Niño exists.

There is every reason to examine exposure.

Where do critical supplies originate?

Are alternative suppliers available?

Is the business heavily dependent on electricity?

Does it have adequate insurance?

Could employees or freight routes be affected by bushfires?

Would rising food prices materially reduce margins?

Could customers reduce discretionary spending?

These are ordinary risk-management questions.

El Niño merely provides a reason to ask them now.

The Business Times View

El Niño is not simply something for farmers and weather forecasters.

It is another variable in Australia's business environment.

Its effects can travel from a dry paddock to a supermarket shelf, from a hot afternoon to an electricity bill, and from a bushfire to a transport network or tourism booking.

The businesses best positioned for climate variability will not be those that correctly predict the weather.

They will be those capable of operating when the prediction is wrong.