From El Niño to La Niña: What the weather patterns mean for FMCG companies, rural demand, sticky food inflation

How is it different from La Nina?

La Niña leads to cooler-than-average sea surface temperatures in the same region, leading to contrasting weather patterns such as heightened rainfall in some areas.

Also Read | Shift from El Nino to La Nina portends rains in Asia, dryness in Americas

How did El Nino impact India?

The World Meteorological Organization declared the global onset of El Niño conditions on July 4, 2023. As a result, India saw uneven monsoon distribution, “leading to continued subdued performance in rural areas”, said Preeyam Tolia, Senior Research Analyst - FMCG, Axis Securities. This had a significant impact on incomes in Tier-3 cities and rural areas, as they heavily rely on agriculture, leading to pressure on rural demand.

What does this mean for a stock market investor?

The waning rural demand has hit the consumption companies’ topline. From the onset of El Niño conditions to today, the Nifty FMCG index has seen flattish growth, rising 1.8 percent. However, in comparison, the frontline index Nifty 50 has gained almost 14 percent during the same time period.

What does La Niña mean for domestic FMCG/consumer staples firms?

A shift from El Niño to La Niña generally brings positive implications for consumption-based companies in India as rainfall improves. This will lead to a boost in demand on account of better disposable income and favorable agricultural yield.

“Higher disposable income should boost the subdued demand outlook for rural India which will provide a significant boost to FMCG companies which are struggling on account of weak rural demand,” said Vaibhav Shah, Fund Manager, Torus Oro PMS.

Also Read | Rice market braces for more stress as El Nino starts to bite

FMCG companies may track this progress closely and if satisfied about such an occurrence, they may raise their marketing and advertising spends and cut back on offers or raise their product prices. Deepak Jasani, Head of Retail Research, HDFC Securities added that this may lead to better expectation of earnings and the consequent rise in their respective stock prices.

“For FY25, normal or above-normal monsoons could boost rural demand, but supply chain disruptions may occur," added Atul Parakh, CEO, Bigul.

"We anticipate a gradual resurgence in demand as inflation rates decrease. A robust monsoon season would further enhance this scenario, leading to improved profit margins and an upswing in rural demand. Hence, the FMCG sector's performance is intricately linked to climatic patterns, underscoring the importance of a strong monsoon season," said Vincent KA, Research Analyst, Geojit Financial Services.

What does El Niño mean for India’s food inflation?

As weak rainfall and weather patterns impacted harvests, food inflation in India surged. In February 2024, food inflation, measured by the Consumer Food Price Index, which makes up nearly half of the overall consumer price basket, increased to 8.66 percent from 8.3 percent in January. However, it showed a slight easing from the 9.53 percent recorded in December 2023.

As per a report by international brokerage Nomura, the challenge of higher food inflation is likely to persist in the near term amid low stocks. However, expectations of a better crop harvest later in the year could have a beneficial effect on cereal prices in H2CY24, especially if it also results in a removal of India’s rice export restrictions.

However, experts are in the wait-and-watch mode. “Food inflation may also moderate; however we need to track the local pulses and oil seeds production and the global prices of edible oil for better assurance,” cautioned Deepak Jasani.

If La Niña contributes to reducing overall food inflation, India might see the much-needed volume growth, said Preeyam Tolia of Axis Securities. “However, at this current juncture, we expect beverage companies like Varun Beverages to perform better than the rest of the FMCG sector,” he added.

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