Middle East war + Super El Niño! UBS warns: Asian food inflation may heat up across the board

Asian food prices are facing a dual pressure squeeze. UBS analysts have issued a warning: The El Niño climate event and fertilizer price shocks triggered by the Middle East conflict are brewing simultaneously, which could significantly push up inflation levels in Asia from later this year to 2027.

A report led by UBS analyst Leigha Miyata stated that the probability of an El Niño phenomenon occurring between May and July 2026 has risen to 82%, and the probability of it persisting between December 2026 and February 2027 is as high as 96%. This means major agricultural areas in Asia may face drought risks, which could impact yields of key crops such as rice.

Meanwhile, the UN Food and Agriculture Organization's Food Price Index recorded an average of 130.7 points in April, up 1.6% month-on-month, marking the third consecutive monthly increase. Thai white rice prices surged 20% in May alone, the largest monthly rise since 2008, and Chicago rice futures also rose 15% last month.

These signals indicate that food inflation pressure has already emerged in several Asian economies. The inflation rate in the Philippines jumped from 2.3% in February and 3.9% in March to 7.1% in April; Thailand shifted from deflation in February-March to 2.9% inflation in April. UBS economists predict that Asian inflation will further rise, driven by base effects.

El Niño Probability Rising, Harvests in South and Southeast Asia Threatened

According to data from the U.S. National Oceanic and Atmospheric Administration (NOAA), the probability of El Niño persisting from late 2026 to early 2027 is approaching certainty. Miyata pointed out in the report that historical patterns show that during El Niño, temperatures in Indonesia and northern Australia tend to be higher, while rainfall decreases in South and Southeast Asia, posing a direct threat to agricultural yields.

If El Niño develops as expected, UBS forecasts that drought effects will impact the harvest season in South and Southeast Asia from September 2026 to April 2027. The report specifically names Thailand and India as the most negatively affected countries in the Asia-Pacific region, and food importing countries including Japan will face greater import price pressures.

In addition, should a "Super El Niño" occur, the typically lower temperatures in South Korea and Japan may reverse, bringing extreme heat and heavy rainfall that further disrupt regional agricultural production.

Fertilizer Price Shocks Transmitting Along the Supply Chain

Since the outbreak of the Middle East conflict, fertilizer prices have been under continuous pressure. UBS data shows that while urea prices have retreated about $190/ton (approx. 23%) from April's peak, the cumulative increase since the escalation of the Iran conflict remains at 23%. Ammonia prices are stable and firm, and ammonium nitrate solution (UAN) prices also remain stable.

The UBS chemicals team notes that the market has passed the period of most acute seasonal supply constraints, and Q2 may be the annual price high. However, due to restricted trade flows and capacity constraints, structural tightness in supply is expected to persist, supporting fertilizer prices to remain above the cost curve from late 2026 to 2027. The report also notes that the real impact of rising fertilizer costs on crop yields is expected to begin emerging from April 2027.

Additionally, reported prices for Japanese plastic packaging have risen by 20% to 30%, and transportation costs are also increasing. These factors are expected to further push up food retail prices, though they have not yet been fully reflected in Japan's inflation data.

The Ripple Effect of El Niño on Asset Prices: From Sugar to Thermal Coal

UBS’s report outlines the potential impact of El Niño across various asset classes. In agriculture, tight global sugar supply-and-demand is compounded by large speculative short positions; should El Niño disrupt the Indian monsoon, sugar output may drop by 3 to 8 million tons year-on-year, triggering a sharp price increase.

In the energy sector, extreme heat will boost electricity demand in Asia, especially for cooling, thereby increasing demand and imports of thermal coal and tightening supply in the maritime market. Meanwhile, hydropower generation in Latin America and Africa may decline due to reduced rainfall, further supporting coal demand.

Policy Responses Have Had Some Effect, but Upward Inflation Trend Hard to Reverse

UBS economists point out that after the outbreak of the Iran conflict, several Asian economies quickly implemented policy measures, somewhat suppressing initial inflation readings. However, the report clearly predicts that inflation will continue to rise in the future.

Based on current data, inflation is on the rise in major Asian economies except Indonesia and Japan. Corn futures prices for 2026 and 2027 have risen by about 4% and 5% respectively since the outbreak of the Iran conflict. In Japan, while the annual food inflation rate slightly retreated from 4.6% in April to 4.1% in May, it still grew 0.3% month-on-month. UBS expects Japan’s national CPI to rise slightly from 1.4% in April to 1.5% in May, with April possibly being the cyclical low point for inflation.

Overall, impacts from energy and fertilizer prices, El Niño climate risks, and base effects combine into three major factors that will sustain upward pressure on Asian food inflation during late 2026 to 2027, posing significant risk to consumers, central bank policy paths, and regional asset prices.

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