What if the cost-of-living crisis is far from over? As El Niño threatens global harvests and geopolitical tensions continue to disrupt supply chains, food prices could remain volatile well into 2027. Here, we breakdown the latest developments and more importantly, where it leaves investors.
So far in 2026, energy price volatility as a result of the Iran conflict in the Middle East has dominated the conversation, particularly the knock-on effect on inflation and economic growth. However, extreme weather patterns have been bubbling away in the background and expected to add further market unease in the months ahead. ‘El Niño’, a recurring climatic pattern that disrupts weather around the world, is developing once again into what could be the strongest on record – a so-called ‘Super El Niño’.
What is El Niño and how does it impact financial markets?
El Niño typically occurs every two to seven years and is one of the few climate events with a truly global reach. Driven by unusually warm sea temperatures in the equatorial Pacific Ocean, it can lead to weakened crop yields and consequently push food prices higher. This time, its return coincides with fresh tensions in the Black Sea region, adding further strain to an already fragile food system, making this El Niño an agricultural risk multiplier.
Closer to home, extreme heat is already leaving its mark on Europe’s economy. Lower water levels on the Rhine are forcing barges to carry reduced loads, while France has been forced to cut nuclear output because rivers are too warm to cool its reactors. Unsurprisingly, these transport disruptions and weather concerns are already constraining supply and filtering through to prices. The UN Food and Agriculture Organisation (FAO) Food Price Index below, which tracks monthly changes in the international prices of a basked of globally traded food commodities, has been persistently climbing through 2026.
Which commodities could be compromised?
The geography of exposure is uneven. South and South East Asia, which rely heavily on the monsoon, face a heightened risk of drought, threatening the harvests of sugar, rice and coffee. India has felt this substantially, with rainfall this season around a tenth below the yearly average – a significant blow given it accounts for 28% of global rice production and is the second largest sugar producer after Brazil. Further south, Australia’s planted wheat area is expected to fall sharply, potentially down 9 million tonnes in 2026/27, marking a significant loss from the world’s top five exporter.
Southern Brazil may see welcome rain, but the country imports more than 90% of its nitrogen fertiliser, leaving its farmers exposed to disruption elsewhere. Much of supply comes from the Gulf, Russia and China, so the tensions in the Black Sea both feed directly into costs. China is a particular risk, having repeatedly curbed urea exports in recent years to protect domestic supply. This points to a wider concern: as supplies tighten, producing countries may restrict exports to keep food and fertiliser domestically, as several did in 2022. Lower supply already means higher costs and protectionism would only add to cost push inflation.
Where will pain be felt?
For almost all major Western economies, the weight of food far outweighs energy in the inflation basket. The one exception is the UK as shown below. Whilst Old Blighty is feeling the brunt of brent’s spike, inflation prints are less sensitive to rising food input costs. Although it must be noted that the build-up of UK food inflation separates out several of the inputs which may underplay the impact on food inflation and see other areas tick up.
Trading short-term weather is rarely a sustainable strategy, since forecasting edge is scarce and these events tend to be transitory. Not every El Niño has pushed food and commodity prices higher. But global supply chains already sit at a fragile crossroads of rising geopolitical dislocation and resilient demand, and history has shown how quickly that fragility surfaces once markets stop pricing in the risk.
How long will El Niño last?
The U.S. National Oceanic and Atmospheric Administration (NOAA), which forecasts weather and monitors the global climate indicate that El Niño conditions are expected to peak from December through February, coinciding with the main planting and crop-development period in South America. Crucially, the most acute agricultural effects tend to lag behind the event’s peak by 6 to 12 months, meaning the pressure on crop cycles and food prices is still building and is likely to extend well into 2027.
Two features distinguish this episode from its predecessors. First, it is unfolding against the warmest baseline on record, which accelerates soil moisture loss and pushes crops into water-deficit conditions earlier in the growth cycle. Second, it arrives with fertiliser supply chains already weakened by the Strait of Hormuz disruption, leaving global food production unusually fragile.
The feed through effect of El Niño
The bottom line is that an easing of affordability problems looks destined to remain elusive. Not all El Niño episodes produce the same impact on agricultural prices. What makes the 2026 scenario exceptional is the overlap with pre-existing shocks. Lifting the blockade on the Strait of Hormuz will ease global energy prices and repair the fertiliser supply chain. But the climatic effects of El Niño are expected to persist into 2027, which could see a prolonged period of uncertainty in global food markets. With global temperatures expected to continue rising, the greater use of trade tariffs as well as the deteriorating geopolitical backdrop, increases the likelihood of food price shocks and volatility over the coming years.
What does the impact of El Niño mean for investors?
With any investment approach that is long-term, it’s important not to make short-term sector bets based on El Niño alone. This is explained in further detail – specifically in relation to the ongoing conflict in the Middle East – in our Financial Illumination podcast (see below or click here). This breakdown of El Niño is also important for investors to understand, since it shows why physical climate risk is becoming increasingly relevant for company analysis.
We do not intend on predicting the precise impact of one weather event, but we aim to navigate the issues by maintaining diversification across geography, sector and in this instance the supply chain within our own investment portfolios. That way, we can be best prepared for a world in which climate related disruptions may become more frequent, more severe, or more financial visible. As always, it’s best to speak with a Financial Adviser.
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This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
