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Inflation risks on the horizon
03/07/2026
Past El Niño episodes show agricultural prices can react late and unevenly. Nevertheless, the current risks need to be taken seriously.
Accountancy becoming an audacious seafaring adventure may sound odd, even to Monty Python fans. But whenever El Niño pokes its head above the water, keeping track of the numbers becomes unusually difficult. In the coming months, investors and central bankers may once again find that a weather phenomenon that starts in the Pacific can complicate inflation, supply chains and market expectations far beyond the ocean. El Niño episodes reflect a recurring shift in ocean heat and atmospheric conditions that alters weather patterns across the globe. Warmer waters in the equatorial Pacific weaken normal wind patterns and gradually redistribute rainfall.[1] As Michael Lewis, Head of ESG Research at DWS clarifies, “El Niño itself is not caused by climate change, but in a warmer world the two can reinforce each other.”
The latest episode is still at an early stage. Yet early indicators point to a strong event, suggesting sea-surface temperatures in parts of the Pacific could rise more than 2.5°C above long-run averages, possibly approaching 3°C by early 2027.[2] Since 1980, there have been only three episodes of similar strength: 1982–1983, 1997–1998 and 2015–2016. That is too small a sample for firm forecasts about the overall impact on global food prices.
Our Chart of the Week therefore takes a narrower view: what happened to soya and palm oil prices during those episodes? The answer is more nuanced than some headlines might suggest. Since 1980, both commodities have generally followed a mildly upward two-year trend. During strong El Niño episodes, however, soya prices often stayed below that path. Palm oil followed a different pattern in those periods: initial weakness, followed by a marked rise later on.
That split makes economic sense in our view. Soya is grown across many regions. Shortfalls in one area can partly be offset elsewhere. Palm oil is more concentrated in Southeast Asia. If rainfall falls short there, the supply impact often arrives with a lag — and with fewer alternatives. Demand matters, too. While Palm oil is used for cooking, the food industry could substitute either soybean oil or canola oil for most situations. However, both plants are also used for biofuels. As governments are taking action to decrease dependency on fossil fuels, biofuel mandates are increasing demand for vegetable oils and thereby further exacerbating the potential supply crunch for food. This year’s crude oil disruptions have also pulled additional soya and palm oil into the fuel mix, which could now amplify potential shortages in these crops.
All told, El Niño is not just a weather story, or even just a food story. For investors, it is a volatility story. Expensive fertilizers, uncertain energy markets and fragile food supply chains leave food markets more vulnerable. As Darwei Kung, Co-Head of Commodities at DWS, puts it: “Agricultural price rallies are usually shorter than those in metals or energy, but when tradable supply is thin, small harvest shocks can still move prices quickly. This comes on top of the longer-term trend of increasing demand for biofuels as governments seek to decrease dependency on fossil fuels. We expect to see further price pressure on food in the coming months and years.” Such effects often arrive with a lag and vary by crop and region. They may still matter for monetary policy: food prices tend to shape inflation expectations, beyond their actual weight in the consumer basket.
Sources: DWS Investment GmbH; Bloomberg Finance L.P. as of 06/30/26
*defined as periods above 2 degree deviation from average sea surface temperature
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients.