By David Rees
The climatic phenomenon known as El Niño — a natural and periodic warming of the Pacific Ocean — threatens to raise global temperatures in the coming months and trigger extreme weather events. According to forecasts by the World Meteorological Organisation, it is expected to arrive between June and August, with a 90 per cent probability that it will persist until November. “We must prepare for a potentially intense El Niño event that will exacerbate drought and torrential rains and increase the risk of heatwaves,” warned the WMO*.
El Niño can affect the global economy in many ways. Previous episodes have disrupted water levels in the Panama Canal, curtailed hydroelectric power generation and caused unseasonal floods and droughts in various regions of the world. All of this has an impact on food production.
Successive waves of inflation driven by commodity prices increase the risk that price pressures will become entrenched, and would coincide with other adverse economic and geopolitical factors. This scenario could lead to a renewed populist shift, particularly in Europe, in the run-up to key elections across the continent.
The relationship between El Niño and food price inflation
Our previous research shows that there is no direct and robust relationship between El Niño indicators (and La Niña, which is the name given to the opposite cooling phenomenon) and agricultural prices. The Oceanic Niño Index (ONI) measures deviations in Pacific sea-surface temperatures from average levels and is the main indicator used to assess the intensity of El Niño and La Niña events. However, our analysis also shows that the correlation improves significantly if the effects of energy prices are excluded from global food price indices. Not surprisingly, there has historically been a close relationship between food and energy prices, due both to transport costs and the high energy consumption involved in fertiliser production. If historical correlations were to hold, a very intense El Niño episode would mean that global food prices would double from current levels over the course of roughly the next year.
Of course, none of these relationships is exact. In fact, our ONI analysis overestimated the impact of El Niño on food prices in 2023, highlighting the difficulty of forecasting both weather conditions and agricultural yields.
Fertiliser shortages and demand for biofuels compound the likely impact of El Niño on food production
On this occasion, the threat of a powerful El Niño event is compounded by other factors that already point to a rise in food prices in the coming months.
Firstly, extreme temperatures are already being recorded around the world this year. By the end of May, more than 50 per cent of the US was experiencing drought, with some 250 million acres of crops affected.
But this phenomenon is not limited to the United States. In May, an unprecedented heatwave swept across Europe, whilst in some regions of India temperatures exceeded 40 °C.
Secondly, although much of the attention has focused on the disruption to energy supplies, the closure of the Strait of Hormuz has also had a significant impact on the global supply of fertilisers. Approximately one-third of the world’s urea comes from that region and is transported through the strait. Since the conflict began, urea prices have doubled, leading to a significant rise in the price of certain food groups.
The risk to agricultural production is greatest in regions that did not secure their fertiliser stocks before the conflict, as well as for crops with high nutritional requirements that enter key stages of development when El Niño reaches its peak intensity. The combination of these risk factors is most clearly evident in rice, wheat, sugarcane and cocoa.
El Niño typically brings weaker monsoon rains and above-normal heat to the farming areas of South Asia, whilst West Africa faces the risk of drier conditions and stronger Harmattan winds, which affect cocoa production. In the case of wheat, the area sown in Australia is forecast to fall sharply, with a potential drop in production of around 9 million tonnes in 2026 and 2027.
Sugar appears particularly vulnerable. In previous El Niño events, production in India and Thailand fell by between 20 per cent and 30 per cent, forcing major producers to become net importers and sending prices soaring. This time, the impact could be even greater, as a growing proportion of sugar stocks is being diverted to ethanol production. Demand for biofuels is being fuelled by the energy crisis in the Middle East, driving up the use of sugar, maize and soyabean oil. Indeed, food prices have already begun to rise, suggesting that tensions in the supply of fertilisers are starting to feed through to prices, and the impact could be exacerbated by more adverse growing conditions.
All of this could exacerbate the trend towards stagflation currently observed in the global economy, as rising energy prices are passed on to consumers. For example, if this combination of factors were to drive a 50 per cent rise in the Food and Agriculture Organisation (FAO) food price index by the end of the year, the usual lags would mean that food inflation in the G7 could reach double figures by 2027, which would be enough to add more than one percentage point to headline inflation.
Although food accounts for a varying proportion of expenditure across markets—ranging from just 10–15 per cent in developed markets to 25 per cent or more in emerging markets—a wave of food inflation, just as the current energy inflation crisis begins to subside, would keep pressure on real incomes and dampen consumption for longer.
Rather than a one-off shock, a succession of inflationary episodes would increase the risk of adverse consequences. The longer inflation remains high, the greater the likelihood of second-round effects on wages, which could ultimately entrench inflationary pressures.
