Why a strong El Niño leaves tropical commodities acutely exposed

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By Marcelo Teixeira and May Angel

LONDON/NEW YORK, June 17 (Reuters) - Global forecasters say a strong El Niño weather pattern is increasingly likely to develop in the second half of the year, boosting temperatures, disrupting rainfall and posing risks to crops the world over.

What is El Niño and why are commodities grown in ‌tropical regions, known as soft commodities, especially exposed?

EL NIÑO

El Niño is a periodic warming of sea surface temperatures in the eastern Pacific caused by weakening trade winds. ‌It occurs naturally every two to seven years and tends to last between nine and 12 months.

The weather pattern typically results in warmer temperatures across the globe, drought in regions including South and Southeast Asia, Australia and Southern Africa, ​and heavy rainfall in others including the southern parts of South America and the United States.

The U.S. National Oceanic and Atmospheric Administration declared the arrival of El Niño last week. Moreover, it said the weather pattern is likely to intensify, with a 63% probability of a very strong or "super El Niño" heading into 2027.

El Niño-driven dryness, heat or excess rains are a blow for farmers already grappling this year with the fertiliser and diesel price shocks spurred by the U.S.-Israeli war on Iran.

Soft commodities have consistently seen strong price gains during past El Niño episodes.

COCOA

Every strong El Niño in the ‌past 55 years has reduced cocoa output, according to investment firm ⁠WisdomTree.

During the last El Niño, which ran from mid-2023 to mid-2024 and was considered moderate-to-strong, top grower West Africa was initially hit by double its normal rainfall, which left cocoa trees exposed to a fungal disease.

In 2024, the weather pattern flipped and West Africa was hit by intense heat and ⁠by Harmattan winds that were unseasonably dry and strong, causing the disease-weakened trees to drop their flowers.

"Everyone thinks El Niño is only associated with droughts in West Africa. This is not necessarily true. Due to climate change ... the result, at times, (is) too much (initial) rain. Right now, this is my biggest concern," said Jim Roemer of consultancy Best Weather.

About half the world's cocoa is grown in Ivory Coast and Ghana, the ​world's ​first- and second-largest bean growers. Ecuador is the world's third-largest, and typically sees excess rains during El Niño ​episodes.

Cocoa prices nearly tripled in 2024 after the West African harvest failed. ‌They rose to record levels above $12,000 a metric ton by late 2024, making the chocolate ingredient more expensive than many industrial metals.