Weather risk returns as El Niño threatens crops, grids and mines

Agriculture remains ground zero

Agricultural markets are typically the first to respond to El Niño developments, reflecting the direct link between weather and crop yields. Rice remains one of the most closely watched markets. Weaker monsoon rainfall across India and parts of Southeast Asia can quickly reduce production prospects in a crop that remains critical for food security across emerging markets. Any deterioration in growing conditions could also revive export restrictions similar to those seen during previous periods of supply stress.

Sugar faces a more complex outlook. Drier weather in India and Thailand may curb production, while excessive rainfall in parts of Brazil can disrupt harvesting and reduce sugar content. The result is often increased price volatility rather than a straightforward directional outcome.

Coffee and cocoa are also firmly on the weather watch list. Robusta coffee production in Vietnam and Indonesia is particularly vulnerable to heat and dryness, while cocoa producers in West Africa face the risk of both excessive rainfall and subsequent heat stress. Given already tight inventories in several soft commodity markets, weather-related disruptions could have an outsized impact on prices.

Not all agricultural markets face downside production risks. Argentina is one of the few major beneficiaries of El Niño, with improved rainfall often supporting soybean, corn and wheat yields. This provides an important counterbalance to some of the production concerns elsewhere. North America, a key producer of several major crops from wheat and corn to soybeans experiences some of the most direct and pronounced geographic shifts during an El Niño, splitting the continent into distinct weather zones, with the southern US and California experiencing cooler, much wetter-than-average winters. Northern US and Canada meanwhile may experience unusually warm, milder and drier winters, potentially lowering gas consumption.

Global food prices point to ample supply ahead of El Niño

The UN FAO World Food Price Index, which consists of 73 price quotations across five commodity groups, has risen around 2% over the past year. Strength in grains, meat, and vegetable oils has been partly offset by weaker prices in sugar and dairy products. Following the Russia-Ukraine-related price spike in 2022, global food production has remained robust and stockpiles broadly sufficient, contributing to relatively stable price movements across major food categories. Weather developments, including potential El Niño conditions, may influence production levels, while fertilizer availability remains an important factor for agricultural markets. At the same time, existing supply levels may help moderate the impact of any production disruptions on prices.

Metals face both weather and power risks

While agriculture typically receives most of the attention during El Niño events, metals markets can also experience significant disruptions. Copper appears particularly exposed. Chile, the world's largest producer, faces elevated risks of heavy rainfall, flooding and landslides that can disrupt mine operations, transport infrastructure and export logistics. At the same time, Zambia remains vulnerable to drought-related power shortages due to its heavy reliance on hydropower generation. Reduced electricity availability could constrain mining activity and processing capacity.

Aluminium and zinc face a different challenge. Several smelters in China's Yunnan province rely heavily on hydropower, making production vulnerable during periods of drought and low reservoir levels. Previous weather-related power shortages have forced curtailments, tightening supply and supporting prices.

Lithium producers in South America could also encounter operational disruptions from unusually heavy rainfall, while iron ore faces a more mixed outlook. Weather conditions in Australia and northern Brazil may improve, but excessive rainfall in southern Brazil could create periodic transportation and logistics bottlenecks. 

At a time when several industrial metal markets are already grappling with low inventories and growing demand linked to electrification, weather-related supply disruptions could further tighten conditions.

Energy demand and grid reliability in focus

The energy impact from El Niño extends beyond supply risks and into demand. Higher temperatures across large parts of Asia tend to increase electricity consumption through greater air-conditioning demand. This effect can be substantial given the region's dominant share of global electricity consumption.

At the same time, drought conditions can reduce hydropower generation, forcing utilities to rely more heavily on alternative energy sources. This combination of rising electricity demand and lower hydro output has historically increased consumption of thermal coal and natural gas across several Asian markets. The natural gas outlook is particularly noteworthy given the recent period of Middle East supply disruptions affecting global LNG flows, including shipments from key exporters such as Qatar. If weather-related demand strengthens, natural gas prices could find support as both Europe and Asia compete for available cargoes - Europe to replenish inventories ahead of winter and Asia to meet rising seasonal demand.

The impact is unlikely to be uniform. Countries with diversified power systems may absorb the shock relatively easily, while regions heavily dependent on hydropower remain more vulnerable. Nevertheless, the risk points toward higher electricity demand and increased fuel consumption at a time when energy security remains a key concern for many governments.

Weather joins geopolitics as a market driver

Commodity markets have spent much of the past several years reacting to wars, sanctions, supply chain disruptions and shifting interest-rate expectations. The return of El Niño adds another layer of uncertainty.

The key takeaway is not that all commodity prices will rise. Rather, weather risk is likely to increase price dispersion and volatility across markets. Regions dependent on rainfall, hydropower or vulnerable transport infrastructure face the greatest risks, while some producers may actually benefit from shifting weather patterns.

For commodity investors, traders and consumers alike, the focus in coming months will be on how quickly the current El Niño strengthens and whether weather developments begin translating into measurable disruptions across crops, mines and power systems. After several relatively quiet years on the climate front, weather risk is once again demanding a place alongside geopolitics and macroeconomics as a driver of commodity prices.