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Stronger El Niño In 2026 Risks Food Inflation – Schroders
After the US weather agency and the World Meteorological Organization declared elevated El Niño risks in 2026, David Rees at Schroders examines how a strong El Niño in 2026, shifting global rainfall and fertilizer supply disruption, could cause food inflation to climb next year.
David Rees, head of global economics at Schroders, assesses how a potentially strong El Niño in 2026, shifting global rainfall and fertilizer supply disruption, could push next year’s food inflation into double-digits.
The climatic effect known as El Niño – a natural periodic warming of the Pacific Ocean – is threatening to increase global temperatures in the coming months and drive extreme weather. According to predictions by the World Meteorological Organization, it should arrive between June and August with a 90 per cent probability of persisting until November. “We need to prepare for a potentially strong El Niño event which will exacerbate drought and heavy rainfall and increase the risk of heatwaves,†the WMO warned.
Last week, the US weather agency – the National Oceanic and Atmospheric Administration (NOAA) – also declared that El Niño is forecast to be stronger than ever.
“El Niño can impact the global economy in many ways, with past episodes disrupting water levels in the Panama Canal, curbing hydroelectric power generation, and triggering unseasonal floods and droughts around the world. Such effects would impact food production,†Rees said.
“Rolling waves of commodity price-driven inflation raise the risk of price pressures becoming ingrained, and would coincide with other adverse economic and geopolitical factors. It could result in a further populist lurch, particularly in Europe, ahead of key elections across the continent,†he continued.
(US-based investment group Nuveen is in the process of acquiring Schroders, an example of several transatlantic wealth management deals in recent months.)
El Niño and food price inflation
Schroders previous research shows that there is not a strong,
direct link between measures of El Niño and agricultural prices.
The Oceanic Niño Index (ONI), which tracks deviations in Pacific
sea surface temperatures from average levels, is the main
benchmark for gauging the strength of El Niño and La Niña events.
However, the firm’s work also shows that the correlation is
improved markedly if the effects of energy prices are stripped
out of global food indices. After all, there has historically
been a close relationship between food and energy prices due to
the impact of transportation costs and the energy-intensive
production of fertilizers.
“If past correlations were to hold, then a very strong El Niño would imply a doubling of global food prices from current levels over the next year or so,†Rees said.
Of course, none of these relationships is perfect. Schroders analysis of ONI overstated the impact of El Niño on food prices in 2023, highlighting the difficulty in forecasting both the weather and crop yields.
This time around, the threat of a powerful El Niño comes on top of other factors that already suggest that food prices ought to rise in the months ahead.
Rees highlighted that there are already extreme global temperatures this year. As of late May, over 50 per cent of the US was in drought, with around 250 million acres of crops being affected. And extreme temperatures are not confined to the US. A record-busting heatwave swept across the European continent in May, while parts of India have seen temperatures soar above 40°C.
Second, much of the attention has been on the disruption to energy supplies. The closure of the Strait of Hormuz, which is now set to be re-opened, has also had a devastating impact on the global supply of fertilizers. “About a third of global urea originates from the region and is shipped through the Strait. Urea prices have doubled since the conflict began and imply a sharp increase in the price of some food groups,†Rees said.
However, on Sunday, the US and Iran agreed on a framework to stop the conflict and reopen the Strait of Hormuz, causing oil and grain futures to fall on Monday. Fertilizer prices reacted more slowly. An official signing is scheduled for Friday in Switzerland. Maurizio Carulli, global energy analyst at Quilter Cheviot, believes that the agreement should help to ease the immediate pressure on fertilizer prices but it won’t be instant.
“The risk to agricultural production is most acute where fertilizer stocks were not secured ahead of the conflict, and for crops with high nutrient requirements that enter their key crop development phases when El Niño intensity peaks,†he continued. “The confluence of these risk factors is most clearly visible for rice, wheat, sugar and cocoa.â€
El Niño brings weaker monsoon rains and above-normal heat to South Asia growing areas, while West Africa faces the risk of drier conditions and stronger Harmattan winds, impacting cocoa production. “In wheat, the Australian planted area is expected to fall sharply, with production potentially down by around nine million tonnes in 2026/27,†he said.
“Sugar looks especially exposed. Previous El Niño events have seen production in India and Thailand fall by 20-30 per cent, pushing major producers toward net imports and driving prices much higher,†Rees continued. “The impact could be more pronounced this time because a greater share of sugar stockpiles is being diverted into ethanol production.†Biofuel demand has also been reinforced by the Middle East oil shock which caused oil prices to surge, increasing usage of sugar, corn and soybean oils. “Food prices have begun to rise, suggesting the squeeze on fertilizer supplies is starting to trickle down to prices, and the impact could be compounded by more difficult growing conditions,†he said.
“While the importance of food to consumer price baskets varies across different markets – ranging from only 10-15 per cent in developed markets to 25 per cent and more in emerging markets – a wave of food inflation, coming just as the current energy inflation shock subsides, would keep pressure on real incomes and dampen consumption for longer,†Rees continued.
“Rolling waves of inflation, rather than a more immediate, one-off shock, increase the risk of adverse outcomes. One is that the longer inflation remains elevated, the greater the chance of second-round effects on wages that could see price pressures become ingrained,†Rees concluded.