Commodity strategists have warned that markets are underestimating the impact of climate change across asset classes, as Europe faces a heat wave and meteorologists warn of the risk of a strong El Niño this year.
The World Meteorological Organization predicts that a “strong El Niño” event will occur in the tropical Pacific Ocean from July to September this year. El Niño is a naturally occurring climate pattern that increases sea surface temperatures in certain regions and is often associated with extreme weather events.
Investment strategists say the high temperatures, droughts, heavy rains and other extreme weather events caused by El Niño will upend bets on commodity assets.
The warning comes as Europe battles an ongoing heat wave this summer.
Parts of the UK have seen temperatures above 30 degrees Celsius (86 degrees Celsius) for almost two consecutive weeks this month, while France has experienced three heatwaves this year and extreme weather last week forced the cancellation of some Bastille Day events. Meanwhile, South Korea issued its first “severe heatwave” warning for the cities of Gyeongsan and Pohang earlier this month after introducing a new warning system in June.
Dan Leonard, MetDesk’s director of U.S. forecasts, said the looming so-called “Super El Niño” could “probably obscure” the major events of 1982, 1997 and 2015.
The impact on commodities is likely to be uneven, he said.
Leonard told CNBC’s “Morning Call” that a warmer-than-usual winter in the north could hit some markets hard and cause prices to rise, while others, such as natural gas, could fall.
Heat risks: from cyclical to structural
Agriculture is expected to face the biggest upheaval, with warming and unstable weather threatening to reduce yields and raise food prices.
Société Générale said agricultural prices rose 7% this month, while soft goods such as cocoa, coffee and wheat rose 8% over the past week.
Food prices rose 3.1% in May from the same month last year, according to data from the U.S. Department of Agriculture. A strengthening El Niño phenomenon could further increase upside risks, with food inflation potentially reaching double digits by 2027, Man Group said in a note.
Albert Chu, natural resources portfolio manager at Man Group, said crop yields could fall by 5-12% in affected areas, while staple foods such as rice could decline by 2-8% as a result of the warmer weather, leading to higher prices.
Corn.
In a recent Man Group note, Chu said treating the current El Niño event as an isolated event and chronically undervaluing climate change in commodities is a “real risk” for investors.
“What if the current El Niño event is just one point in a series of future events?” Chu asked.
Meanwhile, Bank of America analysts said Europe is warming faster than any other continent and heat stress is becoming structural rather than cyclical.
In a note, analysts identified coffee, cocoa, corn and wheat as the crops most vulnerable to rising temperatures.
“These crops are highly sensitive during critical developmental stages of flowering, pollination, and grain and pod packing, and even short periods of extreme heat can lead to significant yield losses,” BofA analysts led by commodity strategist Darina Kowalska said.
They said sugar production in Brazil and Thailand could decline by 10% in 2026-27 due to El Niño-related impacts, while corn remains significantly undervalued.
Kowalska said the bank is bullish on corn because of several weather risks, including worsening heat stress in Europe, the threat of El Niño impacting Brazil, and hot, dry conditions during the U.S. corn pollination season. BofA expects new corn prices to reach $5.50 to $6.00 per bushel, up nearly $1 per bushel from the current level of about $4.70.
copper.
Extreme weather events are also affecting metals, though in different ways, Chu said.
“Copper production is very water-intensive and hot or drought conditions can tighten supply rapidly,” Chu said in a recent Man Group commentary.
“Aluminum is also power-intensive in other ways. Electricity accounts for 30-40% of production costs, and smelters rely on cheap, often hydro-generated power. Growth in cooling, food production, and AI will all compete more intensely for the same scarce power and water resources.”
