Commodity Watch: El Niño’s Hidden Macro Catalyst

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI</strong><br><br>PRESIDENT OF GEMCORP CAPITAL ADVISORS LLC, PORTFOLIO MANAGER<br><br>Ahmad Al-Sati is Portfolio Manager of the Gemcorp Commodities Alternative Products strategy (GCAP) and President of Gemcorp Capital Advisors LLC, based in New York. He is responsible for leading Gemcorp’s commodities-focused investment strategy and overseeing the firm’s US advisory platform.</div></span></div><hr><p data-pasted="true">US newspapers referred to it as the “year without a winter” with record breaking heat and snowless months across the Midwest. Elsewhere, the consequences were severe. In Brazil they called it the Great Drought and in China the Incredible Famine. Overall, 3-4% of the world’s population (~50 million people) died between 1877 and 1878. Although the proximate cause was the strongest El Niño event on record, the consequences were exacerbated by government mismanagement across the globe.</p><p>As I’ve written before, El Niño can cause immediate damage via floods, storms and droughts. It also has significant effects on economies afterwards. According to a 2023 study, the 1997-98 El Niño contributed to almost $6 trillion of economic damage in the subsequent 5 years (which coincided with the Asian Financial Crisis). The 1982-83 El Niño contributed to almost $4 trillion in damage in the subsequent 5 years (which coincided with the Latin America debt crisis). The damage from the 1972 “super” El Niño was not quantified in that study, but the subsequent 5 years coincided with high inflation and economic malaise. Weather may not have caused currencies across Southeast Asia to devalue, LatAm countries to default, or oil prices to skyrocket. But it may have exposed weaknesses that ultimately trigger the headline news and economic pain.</p><p>Today, the US government’s Climate Prediction Center is projecting, with a high level of certainty, an El Niño event for 2026-27 with a 63% chance of “a very strong” El Niño. The direct damage of such an El Niño over the next 5 years will be hard to predict. Some estimates expect ~$2 trillion in damage to the US economy alone. Yet, the impact will be felt across the world. Studies have shown that El Niño lowers economic growth globally with 56% of countries experiencing lower economic growth over the 5 years after El Niño. It may also contribute to higher inflation by lowering yields and increasing food prices globally. For example, corn and rice yields could drop by as much as 4% (Malaysia is projecting a yield drop of as much as 10%). This disruption comes at a time when farmers are already hurting as fertilizer and fuel prices are up during the 2026 spring planting season – this will make food more expensive later.</p><p>In the last 25 years, higher agricultural prices resulted in economic pain at least twice. Between 2007-2012, higher agricultural prices spurred food protests and food insecurity across emerging markets. In the US, it was a cause for bankruptcies in agriculture, food and ethanol. The 2022 increase in food prices contributed to higher inflation and subsequently higher interest rates.</p><p>A weather catalyst to a world economy trying to recover from the disruptions at the Strait of Hormuz could reveal existing fragilities pushing inflation higher (or making it stickier). That in turn will impact credit, volatility and the equity markets with direct consequences for global portfolios.</p><p></p>