The Coming El Niño with Michael Ferrari

Podcast Briefing: an Edited Q&A

The following Q&A has been adapted from the HC Commodities Podcast and edited for clarity and length.

Why El Niño Matters to Commodity Markets

Paul Chapman: For those unfamiliar with it, what is El Niño and why does it matter to commodities?

Michael Ferrari: El Niño begins with a shift in Pacific trade winds and a warming of the Pacific Ocean. The impact goes far beyond weather itself because that shift effectively redistributes heat and rainfall around the world.

In broad terms, Southeast Asia, India and Australia become more vulnerable to dry conditions, while parts of North and South America often receive more precipitation. For commodity markets, that matters because many of the world's largest agricultural producers sit directly inside those regions.

The challenge is that no two El Niño events are ever identical. There are recurring patterns, but the intensity, timing and duration can all vary. That's why market participants spend so much time looking at analog years and studying how previous events affected production, inventories and trade flows.

Could This Become a "Super El Niño"?

Paul Chapman: Why are some researchers concerned that this event could be particularly significant?

Michael Ferrari: One number stands out. In a typical El Niño, subsurface water temperatures might be around three degrees Celsius above normal. Right now, some areas are closer to seven degrees.

That doesn't automatically guarantee an extreme outcome, but it is the sort of anomaly that grabs the climate community's attention. The amount of energy sitting beneath the surface is unusually large, and that's why comparisons are already being made with some of the strongest El Niño events on record.

Why Researchers Are Paying Attention to This Event

Paul Chapman: Why has this El Niño attracted so much attention?

Michael Ferrari: One reason is the amount of heat that's currently sitting below the surface of the Pacific.

Most headlines focus on sea-surface temperatures, but what happens underneath the surface is often just as important. In a typical El Niño, subsurface temperature anomalies might be around three degrees Celsius above normal. Right now they're closer to seven.

That's one of the reasons climate researchers have become increasingly focused on this event. While I don't particularly like the phrase "Super El Niño", the characteristics we're seeing today resemble some of the strongest events on record.

Sugar, Corn and Energy Markets

Paul Chapman: Which commodity markets are most exposed?

Michael Ferrari: Most people immediately think about grains when they hear El Niño, but sugar has the potential to become one of the most consequential markets because of how connected it is to other commodities.

India and Brazil are the key producing regions. If weather affects production in either country, the consequences don't stop with sugar itself. Sugar feeds into ethanol markets. Ethanol links directly into corn demand. Energy prices influence how much sugar is diverted into fuel production versus food markets.

That's one of the recurring lessons in commodities. Markets rarely move in isolation. A disruption in one area can quickly spread through multiple parts of the value chain. 

The Risk to Global Supply Chains

Paul Chapman: Could El Niño affect commodity transportation as well as production?

Michael Ferrari: Absolutely. Commodity markets can absorb isolated disruptions. A single river, shipping lane or export corridor facing problems is usually manageable. The concern is when multiple bottlenecks emerge at the same time.

If water levels fall in key regions and major transport routes come under pressure simultaneously, the impact can spread well beyond the producing regions themselves. That is where volatility tends to increase and markets become much harder to navigate.

El Niño Is Also a Logistics Story

Paul Chapman: Could transportation become as important as production?

Michael Ferrari: Potentially. Commodity markets are generally resilient when dealing with a single disruption. The concern is when multiple stress points emerge at the same time.

We are already operating in an environment where parts of the global logistics system face pressures from geopolitical disruption, shipping constraints and changing trade flows. A major climate event layered on top of that creates additional uncertainty.

If several important waterways and transport corridors come under pressure simultaneously, the impact is amplified. Those scenarios may be low probability, but they're high impact, which is why commodity firms watch them so closely.

Energy Markets Are Watching Closely

Paul Chapman: What could this mean for energy markets?

Michael Ferrari: Higher temperatures generally translate into higher electricity demand, particularly for cooling.

When air conditioning demand increases across multiple regions at the same time, natural gas markets can tighten much faster than many people expect. A system that appears well supplied today can look very different after an extended period of strong demand. That does not mean prices have to rise dramatically, but it certainly increases uncertainty for energy markets.

Thinking Beyond Individual Commodities

Paul Chapman: What is the biggest takeaway for commodity professionals?

Michael Ferrari: One of the easiest mistakes to make is analysing a commodity market in isolation.

Weather affects production. Production affects inventories. Inventories affect freight, energy demand and trade flows. By the time you have followed those links through, you're looking at a much bigger picture than a single crop or a single market.

That's why El Niño is ultimately a cross-commodity story. Even if you're focused on one market, you have to understand the wider system around it. As I often say, you need to look at commodities in the mosaic of everything else that's happening.