Extreme weather puts commodity investors on alert

Extreme weather is becoming a live pricing issue for commodities, from corn and coffee to copper and natural gas. For everyday investors, that can feed through to food prices, inflation data and funds tied to raw materials.

The World Meteorological Organization expects a strong El Niño event in the tropical Pacific between July and September. El Niño is a recurring climate pattern linked to warmer sea surface temperatures in parts of the Pacific, and it can shift rainfall, heat and storm patterns around the world.

Commodity strategists cited by CNBC say markets may be too relaxed about how much climate volatility can move prices. Europe is already dealing with intense summer heat, while forecasters are watching whether this year’s El Niño becomes unusually powerful.

Agriculture sits in the hot seat

Farming is the clearest pressure point. Crops can be damaged when heat or drought hits during sensitive growth periods, such as flowering, pollination and grain development. Lower yields mean less supply, and that can push prices higher if demand holds up.

Societe Generale said agricultural commodity prices have climbed 7% this month. The bank said “softs,” a market term for grown commodities such as cocoa, coffee and wheat, rose 8% over the past week.

U.S. Department of Agriculture data showed food prices were up 3.1% from a year earlier in May. Man Group said in a note that a stronger El Niño could add more pressure, with food inflation potentially reaching double digits by 2027.

Albert Chu, a natural resources portfolio manager at Man Group, said crop yields in affected areas could decline 5% to 12%. He said key staples, including rice, could see 2% to 8% declines because of warmer conditions.

Bank of America analysts said Europe is heating up faster than any other continent, making heat stress a more lasting risk rather than a short-term cycle. Analysts led by commodity strategist Daryna Kovalska named coffee, cocoa, corn and wheat as especially exposed to rising temperatures.

Corn, sugar and the weather trade

Bank of America said corn remains notably undervalued, citing several weather risks: hotter conditions in Europe, possible El Niño effects in Brazil and hotter, drier weather during the U.S. corn pollination period.

The bank expects new-crop corn prices to rise by nearly $1 per bushel from around $4.70, reaching a range of $5.50 to $6.00. It also said sugar output from Brazil and Thailand is likely to fall 10% in 2026 and 2027 because of El Niño-related effects.

Dan Leonard, Metdesk’s U.S. forecasting director, told CNBC’s “Morning Call” that the coming “super El Niño” could potentially exceed the major events seen in 1982, 1997 and 2015. He said the market impact will probably vary by commodity.

That uneven impact matters. A weather shock can lift prices for crops if supply is damaged, while a warmer northern winter could reduce heating demand and weigh on natural gas, Leonard said.

Metals face water and power stress

Extreme weather is also reaching metals markets, though through different channels. Chu said copper production uses a lot of water, so heat and drought can quickly tighten availability.

Aluminum faces another pressure point: electricity. Chu said power accounts for 30% to 40% of aluminum production costs, and smelters often rely on cheap hydropower. Cooling demand, food production and growth in artificial intelligence could increase competition for limited power and water resources, he said.

The takeaway for investors is not that every commodity moves the same way in a hot year. Strategists are flagging a broader risk: weather can change supply, demand and production costs at the same time, and the effects can split sharply across food, energy and metals.

This story draws on original reporting from CNBC.