UBS Expert Conference Call: El Niño Phenomenon Has "Officially Formed" and May Be "Very Strong"

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A possible strongest El Niño in decades is taking shape, and its impact on global agriculture, inflation, and commodity markets has begun to attract investors’ attention.

According to the Zhui Feng Trading Desk, on June 12, UBS's Global Sustainability Research Team held an expert conference call, inviting Dr. Tim Stockdale, Chief Scientist of the European Centre for Medium-Range Weather Forecasts (ECMWF), to deeply interpret the latest developments of the El Niño phenomenon and its market impact.

Just one day before the call, the US National Oceanic and Atmospheric Administration (NOAA) officially announced on June 11 that El Niño had formed and predicted it will further strengthen to moderate or strong levels by this autumn. This official declaration marks the shift in market concern from anticipation to reality.

How strong is this El Niño?

The mechanism of El Niño formation is not complex: when a large amount of unusually warm water in the western Pacific drifts toward the central and eastern Pacific, the normal trade winds weaken, cold water upwelling decreases, and sea surface temperatures rise further—a self-reinforcing cycle. Once a strong event forms, substantial heat will be released into the atmosphere and spread globally.

The special feature of this event lies in its scale. Dr. Stockdale pointed out in the call that there is currently a mass of anomalously warm water in the central tropical Pacific exceeding 30°C, covering an area equivalent to the entire continental United States, "which he considers extremely unusual."

ECMWF's model gives a clear signal: this El Niño "has almost no chance to be below 2 degrees," and the multi-model median predicts 3 degrees by November. According to grading standards, a sea surface temperature anomaly of 2 degrees constitutes an "extremely strong" level (El Niño usually peaks around December). NOAA's latest data show a 63% probability of developing into an extremely strong event.

It's worth noting that the term "super El Niño" often used in media is not an official term. Dr. Stockdale clarified this specially.

A new indicator: Relative Niño Index

In addition to the traditional sea surface temperature anomaly indicator, ECMWF has also introduced a newer "Relative Niño Index"—it measures the temperature difference in the Niño region compared to the entire tropical area, not the absolute temperature.

Currently, the relative index is about half a degree lower than the traditional indicator. The logic behind this is important: the atmosphere's response to the temperature gradient is more sensitive than to absolute temperature. As global warming raises background temperatures across the entire tropics, the traditional indicator may overestimate the actual atmospheric impact of El Niño.

But climate change brings another amplification effect: in a warmer background, soil dries faster when it doesn’t rain; when it does rain, there is more moisture in the atmosphere, and precipitation is more intense. This makes prediction more complex.

Agriculture: Overall negative, but impacts are uneven

The impact on agriculture is one of the core issues most concerning to the market.

The overall judgment is: El Niño generally negatively affects global agricultural yields, but the impact is uneven—some regions (such as those with improved rainfall conditions) may actually benefit.

Specifically for major crops: corn, rice, and wheat yields are typically below normal in El Niño years, pushing prices higher; soybeans are an exception, showing a positive response globally on average.

Sugar is especially notable. Global sugar supply and demand is already tight, with substantial speculative short positions. If El Niño leads to a weakened monsoon in India (current forecasts for rainfall are about 92% of normal levels), Indian sugar output may drop by about 3 to 8 million tons year-on-year, triggering large price swings.

Inflation transmission: Food prices are the key variable

El Niño's impact on inflation has a clear path: weather shocks → decreased agricultural production → rising food prices → spreading inflationary pressure.

Calculations show that year-on-year changes in the IMF Global Food Price Index (lagged four months) can explain about 94% of food inflation volatility in emerging markets, and about 83% in developed markets. This means that once global food prices rise due to El Niño, inflationary pressure transmits almost deterministically.

Take India as an example: the risk of a weaker monsoon caused by El Niño may raise food inflation, but because food’s direct weight in the CPI is about 21%, the direct impact of one shock is relatively limited. The real risk is: if the shock persists, the second-round effect (i.e., spreading inflation expectations) becomes harder to control.

Energy and insurance: Rising coal demand, hurricane season may be calm

El Niño impacts the energy market mainly in two ways, opposite in direction but with the same result—both point to rising demand for thermal coal.

On one hand, extreme heat may sweep across Asia, boosting electricity demand (especially for cooling), increasing coal consumption and imports, tightening the shipping market.

On the other hand, El Niño usually reduces rainfall in Latin America and Africa, leading to less hydroelectric generation, and the gap needs to be filled by thermal power.

The insurance industry faces a relatively favorable short-term window: Hurricane activity in the Gulf of Mexico is usually below average in El Niño years, which helps improve insurers’ balance sheets. But note, fewer hurricanes does not mean reduced intensity. In Australia, catastrophic losses in El Niño years are typically lower, but drought and wildfire risks rise; some regions of South America may face more flooding.

Regional impacts: Clear signals in tropics, uncertainty in mid-latitudes

Dr. Stockdale emphasizes that every El Niño is unique, but some consistent patterns emerge. Signals for tropical regions are quite clear and stable, while mid-latitude regions (such as Europe) are less affected and harder to predict.

This means that for investors in tropical and subtropical regions like Asia, South America, and Australia, the impact path of El Niño can mostly be referenced from historical patterns; for European markets, there is greater uncertainty and model forecasts should be treated more cautiously.

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