Why El Niño matters for investors

A major climate event in the second half of this year that could ripple through economies, supply chains and financial markets over the next 18 months has been predicted by forecasters. Scientists increasingly believe that a powerful El Niño is likely to form, with some forecasts suggesting it could develop into a rare "super El Niño" comparable with some of the strongest events on record. History suggests major El Niño events can have meaningful consequences for investors.

The potential economic consequences of El Niño are enormous. Previous strong events have been associated with droughts, floods, food shortages, higher inflation and significant volatility in commodity markets. In a world already dealing with geopolitical tensions, fragile supply chains and persistent inflationary pressures, the timing is unfortunate to say the least. 

In basic terms, El Niño is a warming of surface waters in the central and eastern Pacific Ocean. Normally, strong trade winds push warm water westwards towards Indonesia and Australia, allowing cooler water to rise to the surface near South America. During an El Niño event, those winds weaken or even reverse. Warm water spreads eastwards across the Pacific, changing atmospheric circulation patterns around the globe. Regions that are normally wet can become dry, while areas that are typically dry can suffer excessive rainfall and flooding. 

Scientists at the European Commission's Joint Research Centre recently said that an El Niño event in 2026 is "virtually certain", with a high probability that it could become exceptionally strong. 

Climate, food and inflation

The greatest worry is about its effect on food production. Modern agriculture remains heavily dependent on stable weather patterns. Crops require predictable rainfall, temperatures and growing seasons. A strong El Niño disrupts all three.

Large parts of Australia, South-East Asia, southern Africa and Central America typically experience drought conditions during El Niño years. At the same time, parts of North and South America, East Africa and sections of Asia often experience heavier rainfall and flooding. 

Neither outcome is good for farming. Drought reduces crop yields and can lead to crop failure, while excessive rainfall can damage harvests, erode soils and make planting difficult. The result is lower agricultural output and rising food prices. 

Food inflation tends to hit consumers quickly because agricultural commodities sit at the beginning of the food chain. Higher grain prices raise livestock feed costs. More expensive feed increases meat and dairy prices. Supply shortages in rice, sugar or vegetable oils eventually find their way onto prices on supermarket shelves.

The commodities most at risk

Several agricultural commodities are particularly vulnerable to El Niño.

• Rice may face pressure if drought conditions develop across key producing regions in South and South-East Asia.
• Palm oil production in Indonesia and Malaysia is also highly sensitive to rainfall patterns.
• Coffee crops in Brazil and parts of Central America can suffer from drought and extreme heat.
• Sugar production can be affected across several major exporting countries.
• Cocoa markets could also face additional volatility. The commodity has already experienced substantial supply disruptions in recent years – and further weather-related stress would risk exacerbating shortages.

The result could be another period of elevated food inflation at precisely the point many central bank hopes of bringing inflation back to target have been put at risk by the energy spike following the conflict in the Middle East. 

Supply chains under pressure

The effects extend well beyond farming. A major El Niño often creates disruptions throughout global supply chains. Drought can reduce river levels and limit transport capacity. Floods can damage railways, roads and port infrastructure. Extreme weather events may delay harvesting, processing and exports.

As we learned during the Covid-19 pandemic, supply chains remain highly interconnected. A poor harvest in one region can increase demand elsewhere, creating bottlenecks across transport networks and pushing up freight costs.

Emerging market economies are often among the most exposed because agriculture still represents a significant share of economic activity. Countries across southern Africa, South-East Asia and Central America could face simultaneous food security and economic challenges if a strong El Niño develops. 

The timing is particularly significant because global supply chains are still adapting to geopolitical tensions, trade disputes and the reshoring of strategic industries. Another climate-related shock would add further complexity to an already fragile system.

The impact is not confined to food. Weather disruptions can also affect energy markets. Drought conditions can reduce hydroelectric power generation in some regions, increasing demand for alternative energy sources.

Industrial commodities may also experience heightened volatility. Droughts and flooding can affect mining operations and transportation infrastructure, disrupting supplies of metals and raw materials. Meanwhile, increased demand for rebuilding and infrastructure repair following extreme weather events can support commodity consumption. 

Some analysts are also watching uranium markets closely. As governments seek reliable sources of electricity to support economic growth and rapidly expanding AI data centres, nuclear power remains an attractive option. Any acceleration in energy security initiatives could reinforce already favourable long-term demand trends.

What it means for financial markets

History suggests investors need to pay attention to major El Niño events.

Commodity markets are often the first to react. Agricultural futures typically become more volatile as traders reassess crop yields and supply forecasts. Bond markets may also pay close attention. If food inflation accelerates, central banks could find it harder to cut interest rates. That would challenge current market assumptions that inflation is largely under control.

Equity markets face a more mixed picture. Agricultural producers and commodity exporters may benefit from higher prices, while food manufacturers, retailers and consumer-facing businesses could face pressure as rising input costs squeeze margins.

Emerging market assets have historically been among the most vulnerable, particularly in countries heavily dependent on agriculture and food imports.

The broader risk is that a strong El Niño becomes another supply-side inflation shock, similar in some respects to previous disruptions caused by energy crises or supply-chain bottlenecks. While unlikely to derail global growth on its own, it could complicate the outlook for inflation, interest rates and corporate earnings during 2027. 

El Niño may begin as an ocean temperature anomaly thousands of miles away, but its effects are often felt in food prices, energy bills and investment portfolios around the world.

With forecasters increasingly warning that the current event could be one of the strongest in decades, investors should pay close attention. The biggest consequences may not come from the weather headlines themselves, but from the inflationary pressures, commodity shortages and supply-chain disruptions that follow.