Commodity markets are bracing for a major new risk factor: extreme weather. The global economy is already grappling with supply shocks from the Middle East conflict and disrupted shipping through the Strait of Hormuz, leaving supplies of various commodities tight. Scientists now predict a severe El Niño event will trigger widespread drought, monsoon rains, and other extreme weather, further constricting commodity supplies.
A strategy team led by Bank of America global economist Antonio Gabriel stated in a research note, "Multiple El Niño prediction models now agree: an El Niño is forming, and it is highly likely to be very strong." The El Niño climate phenomenon refers to an abnormal warming of sea surface temperatures in the central and eastern Pacific Ocean, which disrupts global atmospheric circulation, leading to heavy rainfall in some regions and persistent drought in others. The powerful El Niño forming this year is highly likely to trigger extreme disasters globally, including major floods, droughts, and heatwaves.
Bank of America notes that of the 20 El Niño events recorded over the past 75 years, only six are comparable in strength to the one predicted for this year, making it a rare occurrence. The Oceanic Niño Index, which measures sea surface temperatures in the equatorial Pacific, is already significantly above its long-term average for this period.
Analysts at Bank of America indicate that extreme weather will severely disrupt crop growth cycles, impacting the supply of various agricultural products. This powerful El Niño is expected to peak in the autumn, coinciding with the critical planting season in South America, significantly increasing the risk of soil drought. On May 13, 2026, in Tulia, Texas, USA, farmer Scott Elbeck showed wheat from his field, noting that while the area typically receives 10 inches of rain by this time, only 3 inches have fallen this year.
Impact on Agricultural Products
Wheat: Australian wheat production has historically suffered significant declines during El Niño events. If severe drought occurs, the country's 2026-2027 wheat harvest could be 20% to 60% lower year-on-year.
Corn: Brazilian corn production faces a very high risk of impact, with an estimated year-on-year decline of about 10%. Already tight supplies in the US corn market mean there is a significant risk of a sharp contraction in global grain supplies.
Sugar: JP Morgan points out that sugar is the most sensitive commodity to El Niño. Due to extreme weather, Brazil's annual sugar output is expected to fall by 5%, while production declines in India and Thailand could reach up to 10%, supporting higher sugar prices.
Coffee: Drought in Vietnam and Indonesia is likely to lead to a 5% to 15% reduction in coffee production.
Futures Performance: Year-to-date, soybean futures have risen approximately 17%, wheat futures are up 30%, and rice futures have gained about 42%. Coffee futures have seen a slight decline of 7% this year.
The team led by Jefferies' Lawrence Alexander believes the United States could act as a global buffer for commodities. While overall temperatures in North America are expected to be higher, El Niño tends to suppress Atlantic hurricane activity. This could allow North America to serve as a safety net for global grain supplies, particularly corn and soybeans. In North American energy markets, the reduced risk of hurricanes, combined with expectations of a milder winter, has eased some of the premium associated with extreme weather. However, summer heat will still drive up electricity demand, providing support.
Compounding the situation, just as the impact of extreme weather materialises, commodity markets are also facing pressure from geopolitical conflict with Iran. This conflict pushes up energy prices while severely restricting global fertiliser supply. Nearly 30% of the world's nitrogen fertiliser and 50% of its sulphur are transported via the Strait of Hormuz, creating a tight supply situation for key agricultural inputs.
Bank of America commodity strategist Francisco Blanch explains that higher energy prices raise the production and logistics costs of agricultural products, while also pushing up the price of raw materials for biofuels, creating a cascading effect that increases food prices. Bank of America noted in March that Northern Hemisphere farmers had largely completed their spring fertiliser purchases. This left a buffer of about six months before disruptions to nitrogen fertiliser supply would have an irreversible impact on the corn market. This buffer window is set to expire in September, coinciding with the period of strongest impact from the powerful El Niño on global grain-producing regions.
Furthermore, the ongoing Russia-Ukraine conflict continues to threaten global grain supplies. Before the war, Ukraine accounted for approximately 8% of global wheat exports. The Bank of America team concludes that the recent cooling of inflation was largely due to lower commodity and energy prices. Now, with energy and agricultural prices strengthening again, the process of disinflation is likely to be hampered, increasing the stickiness of inflation.
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