El Niño’s Ripple Effects on Markets

**Julia Rizzo** (0:00)
Welcome to Thoughts on the Market. I'm Julia Rizzo, Latin America agribusiness analyst at Morgan Stanley. Today, how only you could move from the Pacific into commodity markets, grocery prices and investor portfolios. It's Wednesday, August 19th at 10 a.m. in São Paulo.
You may not follow rainfall patterns in Brazil or cocoa growing conditions in West Africa, but you immediately notice when chocolate, groceries or electricity cost more. And you can connect the dots to El Nino, a warming cycle in the Pacific Oceans that disrupts weather globally. It changes where rain falls and shapes the outlook for crops, power markets, transportation and inflation. There is now a 95 percent chance of a very strong El Nino in the fourth quarter of 2026 It could end up being among the most powerful events in more than 75 years of record history.
Timing and location matter greatly. Crop damage often depends on whether heat or heavy rains arrives during a narrow planting, flowering or harvest window. The most direct effects are likely to appear first in the commodities. Sugar is one the least of the commodities most exposed to favorable price dynamics from weather conditions. Cocoa also looks tight. Grains are more complicated. Soybeans need evidence of a net South American production loss. Problems in Northern Brazil may be offset by stronger crops in Argentina or Brazil South. Corn is even more dependent on timing. The key near term catalyst remains US weather and crops. What happens next matter well beyond agriculture markets. Food is the main channel through which El Nino reaches the broader economy. And the effect usually appears after one year lack. That makes inflation primary at 2027 story. In Latin America, the largest incremental inflation risk are concentrated in Peru, Brazil, and Colombia, with most of the pressure arrive in 2027 That matters for central banks. Weather shocks can fade, so policy makers often look through initial rising food prices. The greater concerns is that higher food costs may begin to influence inflation expectations, wages, grants or other prices across the economy. Colombia stands out at the clearest case where those second round effects could complicate monetary policy.
India and Indonesia also face meaningful economic exposure. Agriculture accounts for a large share of output and employment in these countries. India is especially sensitive. Agriculture represents about 18 percent of the GDP, 43 to 45 of jobs, while food makes up roughly 36 percent of the consumer price basket. Record food reserves may provide some protection, though a poor growing season could still weight on rural incomes and keep food inflation elevated.
The economic consequence will vary widely. Higher agricultural prices can support pharma income and benefit some parts of the food and agriculture supply chain. They can also raise costs for households, food producers, and businesses that depend on grains and sugar. Utilities may benefit in markets where hotter or drier conditions lift electricity prices, while heavy rainfall could disrupt transport routes and airports in those exposed regions.
Historical asset price signals are limited, so this is less of a broad macro trade than a detailed assessment of local exposure. Rainfall, crop timing, inventories, and the ability to pass higher costs on to consumers will determine where the pressure lands.
El Nino may begin in the Pacific, but its market footprint can travel from cocoa farms in West Africa to a grocery aisle, a power grid, or a central bank meeting.
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**SPEAKER_2** (4:17)
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