Why Investors Should Track El Niño

Aug 1, 2023

The weather phenomenon could bring surging temperatures, higher food prices and stubborn inflation. How can investors prepare?

Christopher K. Baxter

Key Takeaways

  • El Niño could reduce the global availability of key agricultural commodities and push up food prices.
  • Resulting inflationary pressures could spur central bankers to remain hawkish on interest rates for longer than expected.
  • Investors should consider exposure to certain “soft” commodities and watch for a possible rebound in the agriculture sector.

Get ready for even warmer weather: The climate phenomenon known as El Niño has arrived and could strengthen into 2024, bringing above-average temperatures across much of the world. Forecasters now see a 90% chance that the planet will experience El Niño conditions of at least moderate strength by this winter and a nearly 50% chance of a strong El Niño developing.1 This could have significant implications for agriculture and commodities markets, global food prices and even inflation. Here’s what investors need to know.

Declining Crop Yields, Rising Food Prices?

El Niño, which occurs every two to seven years and can last up to 18 months, can create drought conditions in Asia, Australia and parts of Brazil as well as wetter weather in the U.S. and parts of Africa. The weather phenomenon, which last occurred in 2018-19, has been observed since the 1600s and, thus, has a well-known impact on crop yields that may affect commodities prices in the short to medium term. In one study, for example, researchers found that El Niño negatively impacts crop yields for nearly 25% of harvested areas worldwide. With 60% of global food production occurring in only five countries that are all heavily impacted by El Niño—China, the U.S., India, Brazil and Argentina—even a moderate El Niño can have an outsized impact on the global food supply, reducing the availability of key commodities and pushing up prices.


Complicating matters today is the fact that food prices are already high. While a temporary price surge created by the Russian-Ukraine war has begun to recede, a moderate-to-strong El Niño could cause shortfalls that drive global food prices back up. This would contribute to broader inflation, offsetting some of central banks’ recent progress in taming it.

How Can Investors Prepare?

A severe El Niño could have far-reaching consequences for the world. Investors may want to consider three things in positioning their portfolios for the potential disruption:

  1. 1
    Prepare for more central-bank hawkishness.

    Higher global food prices could fuel inflationary pressure and spur central bankers to remain hawkish on interest rates for longer than expected, which would weigh on valuations.  

  2. 2
    Seek potential growth in grains.

    While prices in “soft” commodities such as sugar, coffee and cotton have been on the rise since 2022, prices for grains like soybeans, corn and wheat had been trending downward and only recently reversed. A strong El Niño that significantly reduces the amount of grain crops harvested could push prices higher.

  3. 3
    Watch for a possible rebound in agribusiness stocks.

    The DAXglobal Agribusiness Index, which replicates the performance of global agribusiness companies, was recently trailing the S&P 500 by nearly 20%. While El Niño can lead to near-term declines in agricultural production, it may also set the stage for the agriculture sector to pull ahead during the next cycle. Our analysis shows the DAXglobal index has outperformed the S&P 500 by a median of 9 percentage points in the 12 months following a peak in the Oceanic Niño Index, which measures El Niño duration and severity.

The severity of this El Niño event will determine how severely markets are affected. But investors should be aware of the risks in certain commodities markets and look out for opportunities in agribusiness-related companies.


To learn more, ask your Morgan Stanley Financial Advisor for a copy of the June 14 Global Investment Office report, Global Insights: El Niño Threatens Global Commodity Markets. Your Financial Advisor can help you position your portfolio ahead of potentially intensifying weather conditions.

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