According to a research report, the anticipated strong El Niño event suggests focusing on supply-side disruptions and price revaluation opportunities in the palm oil, rubber, sugar, and cotton industries.
With demand growth and constrained supply, palm oil prices may see further increases due to climate-related production cut expectations. Rubber demand remains relatively stable, but prices could be driven higher by delayed tapping caused by high temperatures and drought. International sugar prices have strong underlying support, given inelastic global consumption, uncertain Indian export policies, and weather risks in key producing regions. Regional disparities in cotton production are heightening supply uncertainty, with weather disturbances potentially amplifying market volatility.
The primary viewpoints from the report are as follows:
El Niño Returns: Focus on Agricultural Supply Disruptions and Price Revaluation
The National Oceanic and Atmospheric Administration announced on June 11 that El Niño conditions have emerged in the tropical Pacific and issued an advisory. The China Meteorological Administration forecasts the event will develop into a moderate or stronger El Niño during the summer and autumn. El Niño typically brings high temperatures and drought to Southeast Asia and Australia, alters the Indian monsoon and precipitation patterns in the Americas. Combined with the lagged physiological transmission in crops, its impact often manifests with a delay of several months or even into the following year.
The report suggests that agricultural commodities like palm oil, natural rubber, sugar, and cotton, whose primary production regions are highly concentrated in the core areas affected by El Niño, warrant close monitoring for supply-side elasticity and price revaluation opportunities.
Palm Oil: Climate Disruption and Lagged Production Cycle May Make It the Most Elastic Oil
Palm oil production is highly concentrated in Indonesia and Malaysia, both located in the core drought zone of El Niño. Oil palms bear fruit continuously throughout the year. Damage from drought to inflorescence differentiation and fruit development accumulates across stages from the onset of dryness. However, as the proportion of near-mature fruit is limited, production declines typically lag by 9-12 months before being confirmed in total output. Historically, Indonesia's younger tree age allows for faster recovery, creating an asymmetry in the timing and magnitude of production cuts compared to Malaysia.
Furthermore, drought-induced fires constitute a secondary pathway affecting yield, and El Niño significantly increases the potential fire risk. The report judges that the impact of this cycle may initially appear in late 2026 to Q1 2027, with significant production reductions likely in Q2-Q3 2027. Combined with aging trees and planting area controls in major producing countries, this could establish a relatively solid price floor for palm oil.
Natural Rubber: El Niño and Aging Trees Support Prices; Staggered Production Cuts in Major Countries May Form a Natural Hedge
Over half of the world's natural rubber is produced in Thailand, Indonesia, and Vietnam, indicating high industry concentration within the core drought impact zone. Extreme climate change may immediately worsen tapping conditions, forcing delays that affect production schedules and yields. Simultaneously, rubber tree production relies on humid climates, and recovery from drought to production takes approximately 9-12 months.
The report posits that El Niño may be the core driver of supply disruptions in this cycle. The rising average tree age in current main producing regions has reduced the supply structure's resilience and recovery capacity, amplifying the climate's impact on yield and increasing the probability of substantive production cuts, thereby supporting prices. Historically, the timing of yield declines across the three countries may form a natural hedge. Coupled with rapid expansion in emerging production areas, this could partially smooth global production fluctuations. Therefore, in the absence of other significant positive catalysts, the probability of a sharp short-term price surge is low, though price increases still have solid support.
Sugar: Weather Disruptions Combined with Policy and Energy Factors Provide Strong Price Support
The core producing and consuming countries are Brazil, India, and Thailand. Under El Niño conditions, Brazil's Central-South region often exhibits a phased transmission of weather impacts. Early-stage improved precipitation benefits sugarcane growth, while later excessive rainfall may suppress the sucrose content (ATR) and disrupt crushing progress. Abnormal monsoon rainfall in India could affect sugarcane yield, and export quota or restriction policies may further amplify expectations of tight global trade flows. Thai sugarcane is highly sensitive to drought, historically showing a high probability of production cuts, which more directly affects regional spot supply.
Additionally, international oil prices, by influencing Brazil's sugar-ethanol mix, further strengthen the linkage between sugar prices and the energy market. The report judges that this El Niño cycle may have an overall limited impact on global sugar production but could provide periodic support to sugar prices by disrupting market expectations for supply from key producing regions. Whether sugar prices can evolve into an upward trend will still depend on the combined effects of Brazil's sugar-ethanol mix, India's export policies, and changes in global trade flows.
Cotton: Rising Supply Uncertainty Amid Regional Divergence May Amplify Market Volatility
China, India, Brazil, and the United States collectively account for approximately 76% of global production. El Niño's impact pathways on these countries differ. Upland cotton in Texas, USA, is sensitive to drought and extreme rainfall, and fluctuations in abandonment rates could affect U.S. cotton supply. Indian cotton regions are susceptible to monsoon anomalies, posing downside risks to yield. Brazilian cotton area is expected to remain high, but production performance depends on weather and yield changes in main producing regions.
The report assesses that global total production may exhibit weak stability with relatively limited room for supply growth. However, uncertainty regarding the production volume and quality in major exporting countries could still periodically amplify market volatility and enhance price upside elasticity.
Risk warnings include: changes in El Niño intensity leading to actual production increases/cuts falling short of expectations; extreme weather risks; and policy volatility risks.
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