El Niño Probability Over 82%, Sugar, Rubber, and Palm Oil on Watch List

Analysts from Guosheng Securities, including Xu Wenhui, pointed out in a report on May 20th that forecasts from the National Climate Center and NOAA both indicate that an El Niño state will begin in May 2026, with a medium or stronger event forming in the summer and autumn, continuing until the end of the year with a probability of 96%, and a probability of developing into a super-strong level in November exceeding 30%. The report suggests that main producing areas of crops such as sugar, palm oil, rubber, and cotton will be disturbed by climate factors, and expectations of reduced production may drive prices higher.

Sugar is the most complex commodity in this framework. Its price itself has a complete cycle of about 6 years, with signs of a cyclical bottom appearing in 2026, resonating with El Niño. In three historical events related to this, the maximum range increase of sugar prices reached 78%, 55%, and 39% respectively. However, in 2023, Brazil saw a significant increase in production due to abundant rainfall, offsetting the reduction in other producing areas, and sugar prices peaked before the ONI index, which is a counterexample illustrating the crucial relationship between the production of main producing areas.

The common feature of palm oil and natural rubber is that their price reactions have a noticeable lag. The price peak of palm oil usually occurs about 4 quarters after the peak of the ONI index, with historical increases between 45% and 71%; natural rubber lags even longer, about 4 to 5 quarters, with the highest historical range increase reaching 167%. Both are highly concentrated in the Southeast Asia region, which is more sensitive to drought conditions, but similarly in 2023, there was no significant rainfall deficit and the accumulation of stock led to a situation where weather impacts were not fully realized.

The path for cotton is the most complex. Between 2009 and 2010, the supply and demand resonance led to an increase of up to 149%, but between 2023 and 2024, weak demand and abundant production in Brazil to compensate for the reduction in American cotton, also led to the cotton prices to peak before ONI. Guosheng Securities believes that whether cotton can show elasticity depends not only on the weather but also on whether demand and inventory are synchronized.

Thermal power and steam coal follow a different chain of transmission: El Niño raises temperatures, increasing electricity demand in China's summer pattern of drought in the north and flood in the south, leading to an increase in thermal power output and steam coal consumption, which is independent of the logic of reduced agricultural production.

The report emphasizes that what needs to be followed is not El Niño itself, but three progressive nodes: whether the weather in the main producing areas has translated into actual reduced production, whether the reduced production has penetrated the inventory and trade links, and whether the prices have entered the stage of delayed realization. Before that, equating El Niño directly with the rise of commodity prices is a dangerous simplification.