A 'Super El Niño' is expected to squeeze commodities even further this year

Commodities markets may soon have a second major issue to worry about: extreme weather.

As the economy grapples with the supply shock of war in the Middle East and the cut-off traffic through the Strait of Hormuz, markets that are already tight could face even stricter conditions as scientists forecast droughts, monsoons, and other severe climate events from a coming "Super El Niño."

"While there are many El Niño forecasting models, they all agree that El Niño is emerging, and it is likely to be very strong," Bank of America strategists, led by global economist Antonio Gabriel, wrote.

El Niño is a climate pattern in which unusually warm water spreads across the central and eastern Pacific Ocean, shifting weather patterns and bringing heavy rain to some regions and drought to others. A so-called Super El Niño — what scientists see emerging this year — is more likely to trigger severe flooding, droughts, heat waves, and other extreme weather worldwide.

20 El Niño events have been recorded over the past 75 years, the BofA strategists noted. Of those, only six have reached the level of severity expected for this year as the event "gain[s] extraordinary strength."

The Oceanic Niño index, which measures average sea surface temperatures across the equatorial Pacific Ocean, has already shown readings above average for this time of year.

The problem for markets, the Bank of America strategists said, is that such extreme weather can severely disrupt crop cycles and other agricultural commodities. For example, this year's Super El Niño is expected to peak sometime in the fall, threatening to dry out soil in the middle of South America's planting season.

Wheat production in Australia dropped almost universally during past El Niños and could fall by roughly 20% to 60% year on year for the 2026-2027 season if extreme drought conditions emerge. Brazil's corn crop is "highly exposed," the strategists said, and is expected to decline roughly 10% year on year as US domestic corn production has already tightened. Grain supplies, the BofA strategists said, "could collapse."

In other markets, outputs of sugar — most exposed to El Niño, per JPMorgan — could fall 5% year on year, raising prices. Production in Brazil faces a yearly loss of 5%, while India and Thailand face losses of up to 10% year on year, all driven by the extreme weather, the BofA strategists said. Drought conditions in Vietnam and Indonesia could reduce coffee production by anywhere from 5% to 15% year on year.

Soybean futures have already risen roughly 17% year to date, while those on wheat have grown by a greater 30% over the same period. Futures on rice, another potentially threatened product, have appreciated by roughly 42%, while those on coffee have given up roughly 7% since the start of the year.

The US may act as a buffer for international commodities, according to Jefferies analysts led by Laurence Alexander. While warmer-than-normal conditions are expected throughout North America, El Niño dynamics are suppressing Atlantic Ocean hurricane activity, the Jefferies analysts wrote, leaving North America and the US market to act as a "buffer for global grain markets, particularly for corn and soybeans."

In North American energy markets, "the combination of reduced hurricane risk and a likely mild winter points to softer disruption premia," even though "elevated summer temperatures would still support seasonal increases in power demand," the analysts wrote.

Even so, weather-led disruptions arrive just as commodities markets face another major headwind in the war in Iran, which has pushed up energy prices and, at the same time, choked off a major portion of the global fertilizer supply.

Close to 30% of global nitrogen and 50% of global sulfur supplies flow through the Strait of Hormuz, leaving key inputs for farming fertilizers severely tightened. Higher energy prices also flow through to food commodities via higher production, logistics, and biofuel feedstock inputs, Bank of America commodities strategists led by Francisco Blanch noted.

In March, the strategists wrote that "assuming Northern Hemisphere farmers have largely secured nitrogen fertilizers for the current spring planting, there is roughly a six-month window before nitrogen market disruptions have irreversible consequences for the corn market."

That six-month window would end in September, just as the worst effects of the Super El Niño are expected to it key food production regions. The threats also come as the war in Ukraine continues to threaten global grain production. Ukraine was responsible for roughly 8% of global wheat exports before the war, per figures from the country's government.

"At a time when an important fraction of disinflation has come from goods and energy prices, a pickup in price growth across these categories could make inflation stickier," the BofA strategists wrote.

Jake Conley is a breaking news reporter covering US equities for Yahoo Finance. Follow him on X at @byjakeconley or email him at jake.conley@yahooinc.com.

Click here for in-depth analysis of the latest stock market news and events moving stock prices

Read the latest financial and business news from Yahoo Finance