El Niño: risk of extreme weather calls for business response

Laura Ayre of Pinsent Masons, who specialises in supply chain contracts, was commenting after UN body the World Meteorological Organization (WMO) warned of the likelihood of extreme weather hitting parts of the world because of ‘El Niño’ intensifying over the coming months.

El Niño is a naturally occurring climate phenomenon that occurs when parts of the Pacific Ocean become unusually warm, altering the usual pattern of atmospheric conditions. However, there is an increasing body of science that suggests that human induced climate change is amplifying some of El Niño’s impacts. Last week, the WMO said an “exceptional” El Niño will almost certainly persist through to the end of February 2027, bringing with it an increase in global temperatures over land and the risk of extreme weather events. Celeste Saulo, secretary-general of the WMO, said the effects of this El Niño “may be stronger than anything since our monitoring began” and would “deliver a major blow to communities, economies and supply chains across the globe”.

The effects of El Niño vary greatly across the world, with some regions more prone to flooding and others more likely to see intense heat, drought and wildfires. The extreme weather that is associated with El Niño has implications for people, businesses and the environment. It can lead to smaller crop yields and water shortages, pushing up food prices in turn, as well as hit power supplies, disrupt the supply of goods and raw materials, increase freight and insurance costs, constrain productivity, damage physical infrastructure, and harm the health of people and ecosystems.

“The forecast intensification of El Niño and its associated effects over the coming months is the latest threat to supply chain resilience, following on from events like the Covid-19 pandemic, the war in Ukraine, and the Middle East crisis as major disruptors of business operations in recent times,” Ayre said.

“It will be extremely important for businesses to get a handle on how heightened risk of extreme weather across specific regions could impact on their own supply arrangements. In food production, for instance, floods or period of drought will impact crop yields. It can be difficult for food producers and retailers reliant on such crops to mitigate against crop failure and price inflation in a market where supply is more constrained than normal. However, there are some steps that can be taken by customers to position themselves to source available supply at a commercially reasonable pricing point,” she said.

“For example, through the ongoing challenges of shipping via the Strait of Hormuz, we have seen customers revisit supply contracts with a view to obtaining preferential or even exclusive access to shipments of products in short supply. In addition, amidst a volatile environment, some customers have been under pressure to accept price increases from suppliers but been able to negotiate limits on increases to protect themselves against spiralling costs. Other customers have enhanced their forecasting to offers suppliers greater certainty over future orders, which we have seen has helped those customers obtain preferential access and pricing,” she said.

“Customers expect shelves to be stocked and prices to remain competitive regardless of what's happening elsewhere in the world. As climate-related disruption becomes more frequent, resilience, diversification of supply and long-term supplier partnerships are becoming core business priorities rather than contingency measures,” Ayre added. 

Late last week, the UK’s National Audit Office (NAO) warned (51-page / 615KB PDF) that more action is needed to make the UK’s food supply chain resilient to risks of disruption, citing extreme weather as one example of those risks and describing climate change as a longer-term challenge that could “gradually erode resilience over time”.

While businesses in the food supply chain are generally responsible for managing their own operations and resilience to disruptions, the NAO highlighted how the Department for Environment, Food & Rural Affairs (Defra), the lead government department responsible for security of food supply in England, is “less confident about the ability of businesses in the food supply chain to withstand shocks without government intervention over the next five to 10 years”. The NAO probed Defra’s own activities to plan and prepare for a catastrophic event that could severely disrupt food supply and identified areas for improvement.

Among other things, the NAO said Defra should be more specific about the levels of food supply disruption it is willing to tolerate and reflect that in its policy and emergency response decision‑making. It said Defra should further review its response plans, re-evaluate its current approach to engaging with industry on food supply chain matters, examine what other countries are doing to build resilience and adopt measures that it thinks could work here, and review whether it needs further legal powers to enable it to effectively respond to a catastrophic event which causes a severe food supply disruption. The current cross‑government governance approach to food supply resilience should also be assessed to identify areas for improvement, it added.

The UK government warned (14-page / 2.5MB PDF) earlier this year that the UK relies on global markets for its food, importing over 40% of its food from overseas, and that the UK is unable to be food self-sufficient at present based on current diets and prices. It said “every critical ecosystem” relevant to the UK “is on a pathway to collapse”, which it said means “irreversible loss of function beyond repair”. According to the government, the Amazon and Congo rainforests, boreal forests in Russia and Canada, the Himalayas, and South East Asia’s coral reefs and mangroves are “particularly significant” ecosystems for the UK.

“Nature is a foundation of national security,” the UK government said at the time. “Biodiversity loss is putting at risk the ecosystem services on which human societies depend, including water, food, clean air and critical resources. The impacts will range from crop failures, intensified natural disasters and infectious disease outbreaks to conflict within and between states, political instability, and erosion of global economic prosperity. Increasingly scarce natural resources will become the focus of greater competition between state and non-state actors, exacerbating existing conflicts, starting new ones and threatening global security and prosperity.”