El Niño, War, and Fertilizer Costs Create a Dangerous Inflation Cocktail

Global Food Security Under Threat

A powerful confluence of meteorological and geopolitical factors is creating a dangerous inflationary cocktail, potentially destabilizing food markets worldwide. Rory Green, chief China economist at TS Lombard, is the latest prominent voice to sound the alarm, warning that a 'super El Niño' event could unleash severe macro and food inflation risks across vulnerable regions.

In a stark analysis titled "Super El Niño: Famine Follows War?" Green details how disruptions stemming from ongoing conflicts, particularly to energy and fertilizer supply chains, are colliding with adverse weather patterns. This potent mix, he asserts, is crafting a veritable perfect storm for global food prices. "El Niño generally elevates temperatures and significantly intensifies both drought and heavy rainfall," Green explained. "For the global macroeconomy, this translates to an inflationary shock transmitted through food prices – a shock that will be amplified by existing war-driven high fertilizer expenses."

Read Analysis

Recent weeks have seen the Japanese Meteorological Agency officially confirm the emergence of a super El Niño in the tropical Pacific, marking the first major weather agency to do so. If this forecast holds true, climatic disruptions could persist for two years or more. This longevity raises the specter of widespread drought, severe flooding, diminished crop yields, and consequently, sharply higher food costs in critical agricultural zones.

Green's research highlights that El Niño typically correlates with hotter, drier conditions across India, parts of South and Southeast Asia, and Central America. Conversely, regions like southern South America, the United States, and Central Asia may experience increased rainfall. While many developed nations, with the notable exception of Australia, appear relatively insulated, countries like India and those in Latin America are identified as being most exposed to both growth and inflation pressures.

India Grapples with Monsoon Uncertainty

India, a nation heavily reliant on its monsoon season for agriculture, faces a particularly precarious outlook. The India Meteorological Department (IMD) has cautioned that El Niño conditions are expected to intensify during the crucial June-September monsoon period, which typically accounts for approximately 75% of the country's annual rainfall. The IMD's projection of rainfall at 90% of the long-period average (LPA) could signal the country's most significant monsoon deficit since 2015.

That year, initial forecasts of below-normal rainfall were followed by actual precipitation levels far short of predictions, leading to widespread drought conditions. Current early indicators suggest the monsoon is off to a sluggish start, with rainfall in the first half of June falling considerably below average and the monsoon's progress across the subcontinent appearing stalled. This weak start exacerbates existing economic headwinds for India, a country already contending with elevated global oil prices due to its heavy reliance on energy imports.

Damage to the summer-sown crops poses a tangible risk to rural incomes and domestic demand, acting as a potent trigger for inflation. Already, headline Consumer Price Index (CPI) in India climbed to 3.9% year-on-year in May, up from 3.5% in April, with food price inflation accelerating to 4.8%. Analysts anticipate that sustained high commodity prices will permeate broader inflation, potentially pushing headline CPI beyond the Reserve Bank of India's (RBI) flexible target band of 2-6% by the third quarter of fiscal year 2027. The RBI itself has revised its inflation forecast upwards for FY27 to 5.1% and lowered its GDP growth forecast to 6.6%, citing supply shocks from both energy and weather-related factors.

The Indian government is implementing measures, such as bolstering buffer stocks of rice and wheat, to mitigate the potential impact. However, the true extent of El Niño's influence on the monsoon will become clearer by the end of July, a critical month for crop sowing. Approximately a quarter of India's districts have been identified as highly vulnerable to El Niño's effects.

Latin America Faces Inflationary Pressures

In Brazil, a 'Super El Niño' could lead to increased inflation, though the nation is arguably better equipped to handle extreme weather events than in previous years. The phenomenon's impact is geographically uneven: southern Brazil typically experiences increased precipitation and storms, while northern and northeastern regions tend to become drier. Average temperatures are expected to rise nationwide, with a higher frequency of heatwaves.

These conditions, combined with the increasing prevalence of extreme weather events due to climate change, heighten Brazil's risk of severe occurrences. While the country is entering its dry season and its hydroelectric reservoirs are in a more stable position than in prior El Niño cycles, the potential impact on power prices remains. Dry weather could strain hydroelectric output, forcing greater reliance on more expensive thermoelectric plants and potentially increasing electricity costs through tariff adjustments. Energy consumption and spot market prices may also climb during heatwaves due to increased air conditioning use.

Food prices may feel the effects of El Niño, albeit with a lag of three to four months for fruits and vegetables, and even longer for grains. Brazil has already harvested its summer soybean crop, and the winter corn harvest is anticipated in August and September. Doubts already exist about Brazil's ability to expand soybean and corn acreage in the upcoming season due to unfavorable global prices and rising input costs, potentially leading to reduced fertilizer use. This could translate to higher production costs for these key crops in the 2026/27 season, impacting the cost of meat and biofuels in subsequent years.

Mexico is likely to experience the most immediate effects through agricultural prices. Historically, adverse weather has reduced agricultural output, subsequently impacting livestock prices due to degraded pasture conditions and water scarcity. Agricultural inflation in Mexico previously peaked at 14.33% year-on-year during a prior El Niño period, with fruits and vegetables reaching 25.69%. Currently, fruits and vegetables saw a spike to 21.77% in March, and despite easing, remain significantly above headline inflation.

The central bank, Banxico, faces a complicated scenario. While economic growth concerns might suggest further interest rate cuts, a significant El Niño could push agricultural inflation higher through supply-side shocks. This would complicate any further easing cycle, even as growth falters. Furthermore, El Niño exacerbates structural vulnerabilities to extreme weather. Warmer sea surface temperatures fuel more active hurricane seasons along the Pacific coast, increasing the risk of damage to infrastructure and agriculture. Urban water supplies also come under pressure; a previous El Niño event saw a critical reservoir for Mexico City fall to just 27% capacity, though a wet 2025 has provided some buffer.

Reading Between the Lines

The confluence of a potent El Niño event with existing geopolitical tensions and elevated input costs presents a multifaceted inflationary threat, primarily channeled through agricultural markets. While developed economies are largely shielded, emerging markets in Asia and Latin America stand out as particularly vulnerable. India's monsoon season, a critical determinant of its agricultural output and economic stability, is under close observation.

The potential for diminished crop yields in these key regions, coupled with already high fertilizer expenses, creates a scenario where food prices could see a sustained upward trajectory. This inflationary pressure could complicate monetary policy decisions in countries like Mexico, where central banks must balance growth concerns with the risk of supply-driven price shocks. The interconnectedness of energy, fertilizer, and food markets means that disruptions in one area can rapidly cascade, demanding close monitoring by investors and policymakers alike.

Traders should pay close attention to weather forecasts, agricultural commodity prices, and inflation data from the most exposed regions. The impact on currencies like the Indian Rupee (INR) and the Brazilian Real (BRL) is a key consideration, as is the broader effect on global inflation expectations and the potential for shifts in central bank policy. The agricultural sector itself, including companies involved in crop production, distribution, and input supply, warrants scrutiny.