If there’s one term that comes up repeatedly in farmland investing, it’s El Niño.
We’ve all heard it a thousand times. Heck, Miguel Basomba was talking about it when I was visiting Paraguay last month.
But as I nodded along, I was thinking: If put on the spot, could I explain what El Niño actually is? Or how it relates to La Niña?
The answer is no. Not properly, anyway. And I’ll bet that’s true for most Alts readers.
So as we continue to secure commits for Farmland I, this issue does what I should have done long ago and explores what these two weather patterns actually are, and what they mean whether you trade commodities or own dirt.
Two years ago we teamed up with our resident commodities expert Lukas Kuemmerle to explain why cocoa prices had gone vertical. His call (a weather-driven short squeeze, not a demand story) aged very well.
So when Lukas told me his El Niño/La Niña model was lighting up again, I asked him to walk our readers through what it’s all about.
Lukas Kuemmerle is a commodity researcher, editor & trader from Germany. He is the founder of analytics firm Kuemmerle Research, and writes an insightful and technical Substack called The Commodity Report. This is his third guest issue for Alts. He most recently wrote about why coffee futures surged in 2025.
Table of Contents
Most commodity years are boring
One common piece of investing wisdom is that “commodities do not belong in a buy-and-hold portfolio.”
Most of the time, that’s true. Over the past 30 years, a passive long position in the Bloomberg Commodity Index has delivered returns below equities, with higher volatility. The data supports it.
What that hides is how much work “most of the time” is doing, because this market runs on two speeds: long stretches where nothing happens, punctuated by short periods where everything happens all at the same time.
The difference all comes down to weather.
Farming is a distributed global system, and the concentration can be extreme. Brazil for soy and coffee, West Africa for cocoa, India for sugar and cotton, Southeast Asia for palm oil and rice, etc.
When weather is roughly average across those regions (called the neutral state) the system self-corrects. A drought in one place is offset by good conditions in another. Prices oscillate in a range, traders make money on volatility (not direction), and long-only investors get punished.
But the whole setup breaks when one particular climate pattern wakes up. And this year, it’s doing exact that.
What is the ENSO cycle?
There is one specific climate pattern which drives everything. It’s the El Niño-Southern Oscillation cycle, otherwise known as ENSO.
The ENSO pattern starts in the tropical Pacific, and has three phases:
- Neutral. In the neutral phase, trade winds push warm surface water west toward Asia. This brings rainfall to the western Pacific. This is the usual pattern most of the time.
- La Niña. In La Niña, the westward push strengthens. Trade winds become stronger than normal, pushing even more warm water west and, making the eastern Pacific cooler and drier than usual.
- El Niño. In El Niño, those trade winds weaken or break down. Warm water shifts back toward the central or eastern Pacific, and rainfall moves with it.
This pattern is predictable, but erratic. It flips irregularly, on cycles of two to seven years.
According to the latest official NOAA updates, we are currently in El Niño.
Now, pacific tropical circulation doesn’t just affect tropical Asian farms: it affects much of the world, including temperate farming regions.
An El Niño cycle means:
- Drought across Asia. A drier climate across Indonesia, Malaysia, India, Australia and even parts of Africa affect tons of different crops.
- Europe largely escapes. The connections to European weather are weak. If you’re a farmer in Spain, ENSO is a curiosity. If you’re a farmer in Java, it’s the whole ballgame.
- North America has mixed effects. Typically it means a drier Pacific Northwest, and a wetter southern US. (Interestingly in the midwest corn belt, the effects partly cancel each other out.)
La Niña is the opposite phase. The Pacific cools and the pattern reverses.
The Americas become drier than normal, and Asia becomes wetter than normal.
So both phases disrupt agriculture, but they hit different regions and different crops.
How ENSO years break the “normal” system
In an ENSO year (either El Niño or La Niña) the shocks stop being uncorrelated.
Multiple regions get hit at once, pushing the same direction, and because those regions grow different but complementary crops, the shock cascades across the food system.
You watched this happen recently. The 2023/24 El Niño disrupted West African weather, hammering Ghana and Ivory Coast at the same time it weakened the Indian monsoon. By one industry estimate it wiped roughly 14% off global cocoa supply, and prices hit record highs.
Our ENSO model at Kuemmerle Research tracks this across more than 60 years of data. The consistent finding: during strong events, the return distribution of agricultural commodities changes shape entirely.
To explain the graphic above:
- La Niña’s median return is higher, while volatility barely moves.
- El Niño does not deliver a better average month for cocoa.
- What changes is asymmetry: the left tail compresses, the right tail stretches past +40%, and skew flips from negative to +1.1.
In other words, ENSO causes a different payoff shape, not a bigger one.
The second thing that makes ENSO years different is timing. There is typically a six-to-twelve-month lag between the climate signal peaking and the production hit reaching physical markets.
This lag is where money actually changes hands.
Look at what it did to cocoa buyers last cycle. As I discussed in my last post with Alts, New York cocoa traded near $3,400 a tonne in late 2023, touched an all-time high around $12,931 by December 2024 (!), then surrendered roughly 70% of that move through 2025.
Every large manufacturer held the same futures, options, swaps and risk-committee governance. The instruments were never what separated them. What separated them was when they raised coverage. A desk that moved in autumn 2023, as the weather and stocks signals first turned, locked in costs at a fraction of what the calendar-driven hedger paid once the mechanical schedule caught up mid-spike.
That is the timing gap, and it is structural. I put the full post-mortem, including the three signal families that were flashing ahead of that move, into a whitepaper you can read here.
One more thing, and it rarely makes the commodity coverage. The effects escape agriculture entirely. Michael Fritzell, who writes Asian Century Stocks, traced the chain through Asian equities this year.
His findings:
- Drought cuts hydroelectric output across India and Indonesia, pushing those grids back toward coal.
- Higher input costs squeeze the packaged goods companies buying cocoa, wheat and palm oil by the shipload.
- As expected, hotter years sell more air conditioners.
He names the listed companies on each side, which we will not reproduce here. Go read him.
Not every crop reacts the same way
Commodities are not a single asset class! Sensitivity varies by crop, driven by three factors:
- How geographically concentrated production is
- How much cushion exists in stockpiles
- How sensitive yield is to the weather ENSO actually produces.
We rank sensitivity for each crop on a 0-10 scale:
Cocoa tops it. Nearly every strong El Niño of the past half-century has cut global cocoa production, and the mechanism is brutal in its simplicity: roughly 70% of the world’s supply comes from a narrow band of West Africa, and El Niño brings that band heat and drought. During 2015/16, a study of Brazilian cocoa farms found the drought killed 15% of trees and cut yields by 89% in the hardest-hit agroforests.
The 7/10 tier combines geographic concentration with yield sensitivity. Palm oil is essentially an Indonesia-Malaysia story, and a concentrated one: the 1997 super El Niño cut yields there by 10-20%. Cotton is India-Pakistan. Sugar has India as the swing factor, and stockpiles are already thin.
Soy and corn send mixed signals, which is why they score lowest. Brazil tends to benefit from El Niño rainfall on soy, while parts of Asia and the Americas lose on corn.
A quick word on livestock, because readers will ask. Cattle exposure is second-order, arriving through feed costs. But second-order does not mean zero. The US herd is at multi-decade lows, so a feed shock lands with no slack to absorb it.
Farmland I Q&A with founder Miguel Basomba
Response to Farmland I has been strong, and the SPV is looking good.
But we know a persimmon farm in rural Paraguay raises questions, and this is exactly the moment to be asking them.
So we’re recording a Q&A session with Miguel Basomba, the founder of Frutas del Paraguay, who built this operation from raw land starting in 2017.
Have questions on this deal? Ask them here.
El Niño has officially formed in 2026
Last month, NOAA officially declared that El Niño has formed and issued an El Niño Advisory, putting the odds of a very strong event (sea surface temperatures above +2.0°C in the monitored region) at 63%.
Then it got stronger. NOAA’s July update raised the probability of a very strong October-December event to 81%, which would rank it among the largest in the record going back to 1950. Some models now suggest it could top +3°C.
For context, only five El Niños since 1950 have crossed into “super” territory: 1972/73, 1982/83, 1991/92, 1997/98 and 2015/16. The latest model ensemble puts the coming peak in that class.
NOAA updates its official ENSO outlook on the second Thursday of every month. The next one lands August 13. Put it in your calendar.
Where to look first: India’s monsoon
If a single data point will tell us how severe 2026 becomes, it’s the Indian monsoon.
The southwest monsoon delivers roughly 70% of India’s annual rainfall, watering the entire summer growing season: sugar, cotton, rice, pulses and most of the subcontinent’s grain. When it underperforms, the effects ripple across five of the eight crops on our ranking at once.
The season is already leaning bad.
- The India Meteorological Department forecast 90% of the long-period average, and reality has tracked worse.
- June came in roughly 39% below normal, the fifth-driest since 1901.
- The cumulative seasonal deficit stood at 14% as of July 9, and kharif sowing is running about 23% behind last year.
- The IMD’s July outlook calls for below-normal rainfall across most of the country during the monsoon’s single most important month.
History reinforces the reading. Our internal analysis shows every strong El Niño since 1990, with the single exception of 1997, produced below-normal monsoon rainfall. Five out of six. And this setup shares more structural features with the failed years than with 1997.
So is it already priced in?
Fair question. As of last week, no.
- Softs, the complex most exposed to El Niño, is the worst-performing group on the board at -4.5% year to date.
- Cocoa is up only 7.6%
- Sugar is flat
- Coffee is down -14.8%
- Orange juice down -37.6%.
- Grains, meanwhile, are up 21% on hot weather.
Which is exactly what the lag predicts. Markets price supply, and the supply data does not exist yet.
Though a caution in the other direction. When the heat makes a magazine cover, some of the easy money has usually been made.
What this means for farmland itself
Commodity traders experience El Niño as a price event. Landowners experience it as an income event.
- Own farmland in a region El Niño hits, and you get lower yields.
- Own farmland in a region it spares while global prices spike and you get normal production sold into scarcity pricing.
- A landowner in an unaffected region effectively holds a call option on weather chaos everywhere else.
But farmland investing is a long-term game. Which is a good thing, because land values move slower than crop prices.
One El Niño rarely moves land markets. Farmland is priced off multi-year income expectations, not a single-season spot.
How investors express this view
Last week, I published piece last week called Why El Niño Is a Terrible Agriculture Trade.
Since 2016, holding a broad agriculture ETF through El Niño periods produced a negative annualized return of roughly -3.5%, while La Niña delivered closer to +15.5%.
The regime investors instinctively buy is the one that has historically paid the least.
Which is consistent with the cocoa chart earlier, once you read both properly.
- La Niña has the better median.
- El Niño has the better tail.
- Positive skew is not positive expected return
- A basket that owns everything owns both sides of the trade at once.
Crop selection is the whole game. Three broad lanes from here:
1) Futures, options and index products
These the direct route and the professional’s tool.
Leveraged, unforgiving, subject to the roll costs already discussed, and in the index case spreading exposure across the whole complex, which is precisely the problem.
Spectator seating for most readers.
2) Equities
Producers, traders, and input suppliers offer indirect exposure with stock market beta attached.
In a broad selloff your weather thesis can be right and your position still down.
Fritzell’s piece is the most thorough version of this lane we have seen for Asia.
3) Farmland and real assets
This is the slowest and least liquid expression, and for long-horizon investors arguably the most interesting.
This is where Altea spends most of its time, and where accredited investors see opportunities directly.
Closing thoughts
El Niño in 2026 is no longer a forecast. It is here, it is intensifying, and India’s monsoon is already underperforming. The consequences will not reach the supply data until 2027, which is precisely why understanding the mechanism is worth the most right now.
Two dates matter from here. NOAA’s August 13 update, and the monsoon through September.
The weather does not care about your portfolio. But it is remarkably willing to tell you its plans in advance, if you know where to look.
That’s all for this week.
If you enjoyed this issue, subscribe to my Substack: The Commodity Report.
You can also find me in the Altea community.
See you next time, Lukas
Disclosures
- This issue was written by Lukas Kuemmerle, with significant editing by Stefan von Imhof
- This issue has no sponsors. Frutas del Paraguay did not pay to be featured in this issue.
- Alt Assets, Inc has no holdings in any companies mentioned in this issue. Our Farmland I SPV will invest in Frutas del Paraguay.
- Stefan plans to invest personally through the SPV.
