How a Strong El Niño Could Reshape Agriculture and Fertilizer Markets

A potentially strong El Niño event is forecast to develop through the second half of 2026 and into 2027, creating significant uncertainty for global agricultural production, commodity trade, and financial markets. While climate events often trigger broad market concerns, analysis shows the impacts are highly differentiated by region, crop, and time. Understanding this nuance is critical for assessing risk and opportunity across the value chain.

Based on insights from the S&P Global webinar, How Could a Strong El Niño Impact Agriculture, Fertilizer Markets, and Investment Opportunities?, this article examines the primary channels of disruption. We explore how weather anomalies translate into financial exposure and why—counterintuitively—fertilizer demand has historically shown resilience, while prices remain more exposed to supply-side and geopolitical risks.

Key Highlights

• Differentiated Regional Impact: El Niño should not be treated as a uniform global shock. Its effects on agriculture vary significantly by region, with South America, India, Southeast Asia, and Australia facing distinct challenges and timelines related to rainfall and temperature.
• Financial Risk Transmission: Climate risk moves through a multi-stage value chain, from weather anomalies to operational disruption, input decisions, market balances (trade, inventories), and finally to financial outcomes like revenue, credit quality, and valuation.
• Resilient Fertilizer Demand: Historical data over the past 30 years shows a surprisingly weak correlation between El Niño events and total fertilizer demand. Adaptive farming practices, policy support, and shifts in purchasing patterns often moderate the impact.
• Supply-Side Price Drivers: Fertilizer price volatility is more frequently driven by supply-side factors—such as energy costs, freight disruptions, and geopolitical events—than by El Niño-related demand shifts.
• Adaptation Driving New Trends: In response to climate variability, markets are seeing a long-term shift toward adaptation strategies, including expanded irrigation and a rapid rise in the adoption of water-soluble fertilizers to improve nutrient and water-use efficiency.

Five Key Takeaways on El Niño's Market Impact

1. Why is El Niño a regional and crop-specific risk, not a uniform global event?

The agricultural impact of El Niño is determined by where and when changes in rainfall and temperature occur, and whether they coincide with critical crop development stages. Analysis shows contrasting conditions are likely across key production regions. In Brazil, drier and hotter weather could pressure soybean and second-season corn yields, while in Argentina, higher soil moisture could support crop development but also increase the risk of flooding and delay fieldwork. In Asia, India’s monsoon-dependent crops are sensitive to shifts in rainfall timing and distribution, while Southeast Asia’s palm oil plantations face stress from dryness, with production impacts often lagging the initial weather event by 6-12 months.

2. How does climate disruption translate into financial exposure?

El Niño does not translate directly from a weather forecast to financial losses. The risk is transmitted and either amplified or moderated through the agricultural value chain. The process begins with weather anomalies (drought, flooding, heat) that affect farm operations, influencing planting windows and yield potential. This operational disruption then triggers changes in input decisions, such as fertilizer application. The resulting shifts in production forecasts subsequently impact inventories, trade flows, and price volatility. Only after moving through these operational and market channels does the effect materialize in financial statements through revenue, margins, working capital, credit quality, and asset valuations.

3. Does El Niño significantly reduce fertilizer demand?

Contrary to common assumptions, historical data show that major El Niño events do not consistently lead to widespread destruction of fertilizer demand. A comparison of El Niño cycles against total fertilizer consumption over the past three decades reveals a weak correlation, both globally and across the APAC region. Farmers and markets have become more resilient, absorbing impacts through strategies such as irrigation, improved agronomic practices, government policy support, and adjustments to the timing of fertilizer purchases. Rather than eliminating demand, El Niño often causes temporary, localized shifts in application patterns and inventory management.

4. What are the primary drivers of fertilizer price volatility?

While El Niño may influence demand at the margin, fertilizer prices are more frequently and significantly driven by supply-side developments. Analysis of benchmark fertilizer prices from 2001-2025 shows that major price spikes in urea and phosphate markets were primarily linked to energy market volatility, government export restrictions, freight disruptions, and geopolitical events like the Russia-Ukraine conflict. For example, a potential disruption at the Strait of Hormuz would directly affect approximately 29% of the global urea trade and 21% of merchant ammonia trade, posing a greater risk to price stability than a weather-driven demand shock.

5. How are agricultural markets adapting to increased climate volatility?

A key long-term trend emerging from increased weather variability is a structural shift toward climate adaptation and efficiency. This is visible in the steady expansion of irrigated land and the rapid adoption of high-efficiency nutrient products. For example, as producers focus more on water-use efficiency, the market for water-soluble fertilizers (WSF) has grown significantly. In Eastern Asia, the regional share of global WSF consumption grew from 22% in 2010 to 52% in 2023. This indicates that adaptation is occurring not only through the expansion of irrigated acreage but also through fundamental changes in nutrient management to build more resilient production systems.