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 provoke extreme weather events. According to forecasts from the World Meteorological Organization, it is expected to arrive between June and August, with a 90% probability of persisting until November. “We must prepare for a potentially intense El Niño phenomenon that will exacerbate drought and torrential rains and increase the risk of heatwaves,” warned the WMO*.
El Niño can affect the global economy in multiple ways. Previous episodes have disrupted water levels in the Panama Canal, hindered hydroelectric power generation, and caused off-season floods and droughts in various regions around the world. All of this impacts food production.
Successive waves of inflation driven by commodity prices increase the risk of price pressures becoming entrenched, coinciding with other adverse economic and geopolitical factors. This scenario could lead to a new populist turn, especially in Europe, on the eve of key elections across the continent.
The relationship between El Niño and food price inflation
Our previous research shows that there is no direct and solid 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 sea surface temperatures in the Pacific relative to average levels and is the main indicator for assessing the intensity of El Niño and La Niña phenomena. However, our analysis also shows that the correlation improves significantly if the effects of energy prices are excluded from global food indices. Notably, there has historically been a close relationship between food and energy prices, due to both transportation costs and the high energy consumption of fertiliser production. If historical correlations were to hold, a very intense El Niño episode would imply that global food prices could double from current levels over the next year or so.
Of course, none of these relationships are exact. In fact, our analysis of the ONI overestimated the impact of El Niño on food prices in 2023, highlighting the difficulty of forecasting both weather conditions and agricultural yields.
The shortage of fertilisers and the demand for biofuels add to the likely impact of El Niño on food production
This time, the threat of a powerful El Niño phenomenon adds to other factors that already indicate a rise in food prices in the coming months.
Firstly, this year extreme temperatures are already being recorded worldwide. By the end of May, more than 50% of the US territory was experiencing drought, affecting about 250 million acres of crops. But this phenomenon is not limited to the United States. In May, an unprecedented heatwave struck the European continent, while in some regions of India temperatures exceeded 40 °C.
Secondly, while much attention has been focused on the disruption of energy supply, the closure of the Strait of Hormuz has also had a strong 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, which implies a significant increase in the price of some food groups.
The risk to agricultural production is greater in regions that did not secure their fertiliser supplies before the conflict, as well as in crops with high nutritional requirements that enter key development phases when El Niño reaches its peak intensity. The combination of these risk factors is most clearly observed in rice, wheat, sugarcane, and cocoa.
El Niño usually brings weaker monsoon rains and above-normal heat to the crop-growing areas of South Asia, while West Africa faces the risk of drier conditions and stronger Harmattan winds, affecting cocoa production. In the case of wheat, it is expected that the area planted in Australia will decrease drastically, with a possible drop in production of around 9 million tonnes in 2026 and 2027.
Sugar appears particularly vulnerable. In previous episodes of El Niño, production in India and Thailand fell by between 20% and 30%, forcing major producers to become net importers and driving up prices. This time, the impact could be even greater, as an increasing proportion of sugar reserves is directed towards ethanol production. The demand for biofuels is reinforced by the energy crisis in the Middle East, increasing the use of sugar, corn, and soybean oils. In fact, food prices have already begun to rise, suggesting that tensions in the supply of fertilisers are starting to impact prices, and the impact could worsen with more adverse growing conditions.
All of this could exacerbate the bias towards stagflation 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% increase in the Food Price Index of the Food and Agriculture Organization of the United Nations (FAO) by the end of the year, the usual lags would imply that food inflation in the G7 could reach double-digit figures by 2027, which would be enough to add more than one percentage point to overall inflation.
Although food represents a different proportion of spending depending on the markets—from just 10 to 15% in developed markets to 25% or more in emerging markets—, a wave of food inflation, just as the current energy inflation crisis begins to ease, would maintain pressure on real incomes and restrain consumption for longer.
More than a one-off shock, a succession of inflation 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 end up solidifying inflationary pressures.