The El Niño weather effect promises to have an inflationary impact as it shakes a global food production apparatus still recovering from the shock associated with Russia’s invasion of Ukraine more than 12 months ago.

The weather phenomenon could, depending on its severity, have a significant impact on growing conditions in some of the world’s key agricultural regions. According to a blog on the climate website of US government agency, the National Oceanic and Atmospheric Administration, there is a 56% chance of a ‘strong’ El Niño event in 2023.

Gareth Redmond-King, head of international programme at the Energy and Climate Intelligence Unit, a non-profit organisation, says: ‘Confirmation of El Niño’s return has already hit future food prices on global markets. And it confirms this year could be particularly dangerous as the climate crisis and El Niño combine to amplify extremes.’

As Redmond-King observes, there have already been signs of an El Niño effect filtering into soft commodities markets.

Prices for Robusta coffee recently hit a record high thanks to existing drought-related shortages in Brazil and there are expectations other major producers like Indonesia and Vietnam will be impacted by El Niño.

For the UK, which imports around 50% of its food, the impact of El Niño could maintain the upward pressure on food prices which have been a key part of why inflation has been so sticky.

Exposure to soft commodity prices is possible through exchange-traded funds. Among them is WisdomTree Softs (AIGS) which tracks a basket of soft commodity futures markets for an ongoing charge of 0.49%.

Investors who hold the product beyond the very short-term are exposed to the cost of rolling futures contracts. This is the purchase or sale of a commodity agreed at a fixed price for delivery on a specified date – typically either one month, three months or six months ahead.

This facilitates the buying and selling of the respective commodity without anyone having to take physical delivery of a bushel of corn, for example.

Only a tiny fraction of these contracts are settled through deliveries, the bulk are instead ‘rolled over’ to the next month (by selling the current contract and purchasing a new one) and the pattern repeated. The new contracts are often more expensive than those which are being sold.

What is an El Niño ?

An El Niño is a natural, temporary and occasional warming of part of the Pacific that shifts weather patterns across the globe, often by moving the airborne paths for storms.

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