Markets are underestimating the impact of climate change on all asset classes, commodity strategists warn, as extreme heat in Europe and meteorologists signal the risk of a stronger El Niño this year.
The World Meteorological Organization is expecting a “strong El Niño event” in the tropical Pacific between July and September this year. El Niño is a naturally occurring weather pattern that increases ocean temperatures in certain areas and is often associated with extreme weather.
Investment strategists say high temperatures, drought, heavy rains and other extreme weather conditions caused by El Niño are set to boost asset bets.
The warnings come as Europe battles an ongoing heat wave this summer.
Parts of the UK have seen two weeks of non-stop temperatures above 30 degrees Celsius (86F) this month, while France has experienced three heatwaves this year, with bad weather forcing the cancellation of some Bastille Day events last week. South Korea, meanwhile, issued its first “extreme heat” warnings for Gyeongsan and Pohang earlier this month after adopting a new warning system in June.
Dan Leonard, director of US forecasting at Metdesk, said the so-called “super El Niño” could “overshadow” the big events of 1982, 1997 and 2015.
The impact on assets may be disproportionate, he said.
Speaking on CNBC’s “Morning Call,” Leonard said some markets could be hit hard, driving up prices, while others — such as natural gas — could fall if the northern winter is warmer than normal.
Heat hazard: from cycle to structure
Agriculture is expected to face major upheavals, with hot and humid weather threatening to reduce yields and increase food prices.
Societe Generale said prices for agricultural goods rose 7% this month, while soft goods – such as cocoa, coffee and wheat – rose 8% last week.
Data from the US Department of Agriculture shows that food prices were up 3.1% year-over-year in May. A strong El Niño could add further risk, as food inflation could reach double digits by 2027, according to a Man Group note.
Albert Chu, portfolio manager of natural resources at Man Group, said crop yields could drop by 5%-12% in affected areas, while staples like rice could drop by 2%-8% due to warmer conditions, pushing up prices.
Wheat.
In Man Group’s latest letter, Chu said that treating the current El Niño episode as a rare event, and climate change as an underlying asset, is a “real risk” for investors.
“What if the current El Niño is just one point in a line of future events?,” Chu asked.
Analysts at Bank of America, on the other hand, say that Europe is warming faster than any other continent, as heat stress is increasing rather than being cyclical.
In the book, its analysts identified coffee, cocoa, corn and wheat as crops most vulnerable to rising temperatures.
“These plants are very sensitive during the important stages of growth – flowering, pollination, grain and pod filling – where even short periods of extreme heat can lead to large yield losses,” BofA analysts led by commodity strategist Daryna Kovalska noted.
They said corn remains significantly undervalued, while sugar exports from Brazil and Thailand are likely to drop by 10% in 2026-27 due to El Niño-related effects.
Kovalska said the bank is bullish on corn due to several climate risks: increasing heat stress in Europe, the threat of El Niño affecting Brazil, and hot and dry conditions during the US corn season. BofA expects new crop corn prices to rise about $1 a bushel from about $4.70 now, to $5.50 to $6.00.
Copper.
Extreme weather affects metals, though in different ways, Chu said.
“Copper production is very water-intensive, and hot or drought conditions can tighten supplies quickly,” Chu wrote in a recent Man Group statement.
“Aluminum is energy hungry in a different way – electricity accounts for 30-40% of production costs, and smelters rely on cheap energy, often produced by water. Cooling, food production and the growth of AI are all set to compete heavily with the same scarce energy and water resources.”
