In Summary
The emerging 2026-27 El Niño has the potential to become the strongest climate event in more than a decade. While weather events are often viewed as operational risks, this one is more appropriately understood as a macroeconomic event with implications for inflation, trade flows, supply chains and corporate earnings. The IMF estimates that a typical El Niño raises global food prices by around 5% within a year, and the 1982-83 and 1997-98 events led to USD4.1trn and USD5.7trn in cumulative global income losses over the following five years.
El Niño creates an uneven commodity shock, with the greatest disruption concentrated in commodities produced in Asia while grains in Latin America – mainly Brazil and Argentina – could see oversupply from improved growing conditions. Southeast Asia, India and parts of West Africa face heightened risks of drought and agricultural disruption. At the same time, large parts of South America are likely to benefit from improved growing conditions, supporting grain and oilseed production. The result is a divergence across commodity markets, countries and sectors rather than a broad-based inflationary surge. The highest risks are in sugar, palm oil and rice, where drought, low inventories and potential export restrictions could drive price volatility. Cocoa and robusta coffee also face supply pressures, while soybeans, corn and arabica coffee are likely to face price declines on the back of favorable conditions.
For corporates, the implications extend well beyond agriculture. Food manufacturers may face renewed input-cost pressure from sugar, palm oil, rice and cocoa but could pass on higher prices. Consumer-goods companies operating in emerging markets may encounter renewed inflation sensitivity among lower-income consumers. For corporates, involved in the trade of crops that will see a supply surge, especially in Latin America, higher production is not necessarily positive news as selling prices fall, storage capacity could overflow and demand is inelastic (i.e. lower prices do not drive more volume). Governments in food-importing economies could respond with export restrictions, price controls or strategic stockpiling measures that amplify supply-chain disruption.
A super El Niño would transmit inflationary pressure in Asia primarily through food prices, with Indonesia the most affected (+2.3pp) and Malaysia and the Philippines the most insulated (+0.7pp). In Latin America this picture is mixed, with Colombia, Peru and Brazil facing potential pressures. Central banks in the Philippines, Indonesia and India could be forced to hike further or delay easing into 2027, while Malaysia and Thailand would remain on hold. Export bans by major agricultural producers (India, Thailand, Vietnam) would ease domestic pressures but amplify inflation risks for importers, notably the Philippines and Indonesia. In Latin America, drought conditions in Northern Brazil and Colombia could push up inflation while Peru could face disruptions from coastal El Niño.
Super El Niño events normally do not matter much for broader financial markets. The S&P 500 has rallied strongly in every such episode, driven by the concurrent macro backdrop rather than the weather event itself. For emerging markets, food-importing economies like the Philippines and Indonesia show a tendency to underperform global benchmarks in the 12-18 months following an ONI peak (with the exception of 2015-2016). However, each event occurred in a radically different macro backdrop (i.e. Asian crisis, China slowdown, post-Covid inflation) so the signal is too weak and too confounded to be attributed to El Niño alone.