El Niño’s Ripple Effects on Markets

Summary

Julia Rizzo discusses the market implications of a potentially very strong El Niño expected in Q4 2026. She expects the most direct effects to appear first in agricultural commodities, with sugar and cocoa most favorably exposed, while soybeans and corn depend on regional production losses and US weather timing. Food inflation is seen as a 2027 story concentrated in Peru, Brazil, Colombia, India, and Indonesia, with Colombia most at risk of second-round effects complicating monetary policy. Utilities may benefit in hotter or drier power markets, but she argues the opportunity is more about local exposure than a broad macro trade.

• There is a 95% chance of a very strong El Niño in Q4 2026, possibly among the most powerful in more than 75 years.
• Sugar and cocoa are flagged as the most directly exposed or tight commodity markets.
• Soybeans need evidence of a net South American production loss; corn depends on US weather and crop timing.
• Food inflation is likely a 2027 story due to a one-year lag.
• The largest Latin American inflation risks are concentrated in Peru, Brazil, and Colombia.
• Colombia is highlighted for possible second-round inflation effects complicating monetary policy.
• India and Indonesia face meaningful economic exposure given agriculture's large share of output, employment, and food CPI.
• Utilities may benefit where hot or dry conditions lift electricity prices, while heavy rainfall could disrupt transport routes and airports.
• Historical asset price signals are limited, favoring detailed local exposure analysis over a broad macro trade.