In addition, the analyst argues that US policy supporting the use of renewable diesel has worked in its favor: “Forecasts of a particularly intense El Niño ahead have renewed investor interest in agricultural commodities. Our outlook for them has become more optimistic than in previous quarters.”

On corn, Kerstin Hottner believes demand appears reasonably supported by solid feed demand and strong ethanol use. A major upside risk could come from China. “If implementation of the current trade agreement were to lead to a significant increase in purchases of US-origin corn (something not seen in recent years), global demand forecasts could improve meaningfully and provide additional support for prices,” she notes.

She adds that soybeans should be the main beneficiary of any increase in Chinese agricultural purchases, which makes us more optimistic than at the start of the year. Meanwhile, for wheat, fundamentals remain relatively weak, which could lead to higher prices in the future. 

Weather risks: drivers of supply disruptions and price volatility

One of the crops most exposed to the risk of supply shortfalls and the resulting price swings in the months ahead is wheat: Australia is facing one of its weakest wheat harvests in recent years, with the emergence of a drier El Niño expected to cut output by about 25%. Meanwhile, in the United States, winter wheat conditions also remain poor versus historical norms, with only 26% of crops rated “good to excellent”, a modestly supportive factor for prices.

“We see more risks across the whole range of agricultural commodities. The rising risk tied to a pronounced El Niño could negatively affect crop yields and, in some cases, lead to export restrictions aimed at safeguarding domestic supply,” she stresses.

In particular, for coffee, forecasts of a large global surplus have been challenged by disruptions to Brazil’s harvest, declining inventories and growing concerns about El Niño-related weather risks. “While we are not yet ready to take a structurally bullish stance, especially given forecasts for a record Brazilian crop of about 75 million bags, recent market behavior suggests producer selling has remained moderate, contributing to tighter short-term supply,” she says.

In addition, sugar has become increasingly interesting. What began as a year marked by a well-supplied market is gradually shifting toward a more balanced, and potentially deficit, market. The growing allocation of sugarcane to ethanol production in Brazil, the continuation of export restrictions in India and climate risks in Asia have all contributed to a markedly more supportive outlook. With prices still trading near multi-year lows and managed funds holding sizable net short positions, the market offers an increasingly attractive risk-reward profile.

Regarding cocoa, it also stands out as a potentially bullish opportunity. Production prospects in Côte d’Ivoire have deteriorated meaningfully, while forecasts continue to point to a pronounced El Niño episode. Given cocoa’s high sensitivity to weather conditions in West Africa, any further deterioration in harvest prospects could tighten an already fragile supply outlook. While high prices could ultimately weigh on consumer demand, near-term market direction should remain driven mainly by supply developments.

Why agricultural commodities can strengthen portfolio diversification

In the current context, the analyst believes “it is smart to add commodities to a diversified portfolio. The consequences of El Niño will translate into weaker harvests or preventive measures taken by governments to secure domestic supply, even restricting exports, which would amplify price swings well beyond what underlying fundamentals would justify”.

Within agriculture, the main risk lies in geographic concentration. Some commodities are concentrated in regions that are systematically exposed to El Niño-driven weather. “In these cases, localized climate stress can turn into a global supply risk. This is particularly evident for agricultural commodities,” Kerstin Hottner notes. Vontobel’s head of commodities cites Vietnam, the world’s leading producer of Robusta coffee, and Brazil, a major producer of sugar, Arabica coffee, soybeans and corn. She says “both countries are facing drier weather conditions in the second half of this year”.

But El Niño’s impact goes beyond agriculture alone. El Niño-driven shifts in rainfall patterns can affect key transit routes such as the Panama Canal, where water levels directly limit shipping capacity. “A decline in rainfall can restrict cargo loads and transit volumes, creating bottlenecks whose effects ripple through supply chains,” Kerstin Hottner observes.

Cyclone activity is another important factor. El Niño is generally associated with a lower number of hurricanes in the Atlantic, as stronger wind shear prevents storm formation, but above-average activity in parts of the Pacific. A broad basket of commodities therefore offers the best diversification benefit for portfolios, she concludes.