El Niño: Suffer a sea change

Hakan Kaya, commodities portfolio manager at Neuberger, examines the growing pressures on agricultural commodities as fertiliser disruption linked to the war in Iran is compounded by the prospect of a strong El Niño cycle later this year.

Fertiliser shortages stemming from the war in Iran have dominated agricultural commodity headlines in recent months, and for good reason. Disruption of supplies produced in the Persian Gulf have pushed input costs higher, supporting prices across the agricultural complex. But we see a new catalyst forming that could drive the next leg higher: a strong El Niño cycle in the second half of 2026.

El Niño is a climate pattern driven by warming of sea surface temperatures in the central and eastern Pacific Ocean. Its effects ripple across global agriculture by reshaping rainfall and temperature patterns in key growing regions. In broad terms, El Niño brings excessive rainfall and flooding to parts of South America, while triggering drought conditions across Southeast Asia, India, parts of Africa and Australia. The result is a disruption to both planting and harvesting across multiple crops and geographies, often translating into tighter global supply and higher price volatility.

The upcoming El Niño cycle is a meaningful tailwind for agricultural commodity prices

Cocoa is particularly vulnerable. West Africa, the world’s largest producing region, has historically suffered significant output declines during strong El Niño episodes. El Niño can intensify the winds which descend from the Sahara across West Africa. Hot, dry conditions stress cocoa trees, suppress pod development and reduce bean quality. Past strong El Niño cycles, such as 1997-98 and 2015-16, triggered sharp drops in Côte d’Ivoire production. Ecuador, another major origin, has also seen meaningful production losses during past El Niño years. There, the problem is the opposite: excessive rainfall and potential flooding boost fungal diseases and disrupt harvesting.

Sugar faces pressure from multiple directions. Drought risk threatens output in India and Thailand, while wetter conditions in Brazil can disrupt the sugarcane harvest. Brazil’s policy around ethanol blending adds a further variable: elevated ethanol prices incentivise mills to divert cane away from sugar production, compounding the supply squeeze.

Robusta coffee is another area where we see upside risk. Vietnam, which accounts for more than 40% of global supply, is among the regions most exposed to El Niño-driven drought. The 2015-16 event cut Vietnamese output meaningfully and fueled a sharp rally in robusta futures. In contrast, the picture is much more favorable for arabica coffee. El Niño tends to bring rainfall to Brazil’s main arabica-growing regions, boosting supply. Robusta is not included in the standard commodity benchmarks and is less liquid than arabica, but we think this is a good example of why it earns a place in the portfolio. This is precisely the diversification of scarcity sources we look for when adding non-benchmark positions.

Wheat supply faces headwinds as well. Australia, a major exporter, has seen production declines due to drought in nearly every El Niño year over the past six decades, with potential losses ranging from significant to severe. Argentina is also at risk from excessive rainfall and flooding. While elevated global stocks provide a buffer, the direction of travel for wheat is, in our view, higher.

Other grains are more nuanced. El Niño threatens Brazil’s second-crop harvest, but the impact on US corn is mixed as warmer, wetter conditions in the Midwest can actually support yields. Soybeans look well supplied, with record production expected from the top three exporting regions in 2026/27, though US biofuel blending mandates continue to provide a solid source of demand.

El Niño is not a uniform story. Its effects vary by crop and by region. But the broad pattern is that a strong El Niño cycle tends to tighten agricultural supply globally and raise price volatility. Its reach extends beyond agriculture as well, with temperature extremes amplifying heating and cooling demand across energy markets.

Should a strong El Niño materialise on top of the existing fertilizer disruptions, investors could face a particularly challenging combination: food price inflation layered onto energy inflation, creating a double headwind for traditional asset classes. This is supply-driven inflation, the kind that monetary policy can struggle to address. This risk is not adequately reflected in current market pricing. When combined with supply concerns across the broad commodity universe, from copper to oil, we see a strong case for investors to consider tilting asset allocation toward commodities, not only for diversification and inflation hedging purposes but also for the potential for attractive returns. 

By Hakan Kaya, commodities portfolio manager at Neuberger