Here’s what El Niño means for markets and South Africa

Current projections by the US Climate Prediction Center (CPC) assign an 81% probability of a “very strong” El Niño event between October and December 2026, with the likelihood remaining above 50% through February 2027. While weather forecasts are never certain, the message is becoming increasingly clear: El Niño is highly likely. The remaining uncertainty is not whether it will occur, but how severe it will become.

Why El Niño matters

Historically, El Niño has been closely associated with below-average rainfall across South Africa’s summer rainfall regions. The stronger the event, the greater the historical correlation with drought conditions, particularly across the country’s key maize-producing areas.

Other climate indicators are providing little comfort. The Indian Ocean Dipole, another important driver of regional weather patterns, currently appears likely to reinforce the prospect of a drier-than-normal summer. While neither indicator guarantees drought, together they meaningfully increase the probability of weaker agricultural conditions.

For investors, the key question is not simply whether rainfall disappoints, but what the economic consequences are likely to be.

Lessons from 2015

The obvious comparison is the 2015/16 El Niño, one of the strongest on record. That drought caused South Africa’s maize production to fall by roughly one-third compared with normal levels and pushed food inflation to about 12%. The resulting pressure on consumers, agricultural businesses and the broader economy was substantial.

There are, however, several important reasons to believe that the coming cycle is unlikely to produce a repeat of those conditions.

A more favourable starting point

South Africa enters this El Niño with a number of important elements working in its favour compared with 2015.

Following abundant and unusually late rainfall, dam levels remain high, groundwater reserves are healthy and soil moisture is significantly better than it was before the previous major drought. These factors provide an important buffer for crop production, allowing farmers to better withstand a period of below-average rainfall.

The country also harvested record summer maize and soybean crops, leaving unusually large carryover grain stocks. This reduces the risk of shortages and should help to smooth the impact of a smaller 2027 harvest.

As a result, while we expect maize production to decline, we believe the outcome is likely to resemble the smaller crop harvested in 2019 rather than the severe disruption experienced in 2015/16.

White maize currently trades at about R3,400 per tonne in South Africa, which is low in real terms. If prices rise to about R4,500 during mid- to late 2027, this would represent a meaningful increase, but would still be well below the R6,000 per tonne reached during previous supply shortages.

What could it mean for inflation?

Agriculture remains an important driver of South African inflation. Food accounts for about 18% of the consumer price basket, while maize influences prices both directly through staple foods and indirectly through livestock feed and hence meat prices. The impact is even greater for lower-income households, where food represents a much larger share of monthly expenditure.

Even so, the broader inflation picture is more balanced than it first appears. By the time higher food prices begin filtering through, the sharp increase in fuel prices experienced during April and May this year will have dropped out of the annual inflation comparison. We also expect oil prices to have moderated substantially by then, providing an offset to rising food costs.

The net result is likely to be somewhat higher inflation rather than a significant inflation shock.

Implications for interest rates

The South African Reserve Bank’s inflation objective is now centred on 3%. A weaker maize harvest and firmer food inflation could therefore reduce the scope for future interest rate cuts, which had already been increased slightly in the wake of the conflict in the Middle East. Higher-for-longer interest rates would keep borrowing costs elevated and could remain a headwind for consumer-facing sectors of the economy.

Potential winners and losers

While weather forecasts should always be treated with caution, several sectors appear more exposed than others:

• Chicken producers: The industry has benefited from exceptionally low maize prices over the past year. Should maize prices rise as expected, feed costs would increase, placing pressure on margins during 2027;
• Tiger Brands: Milling and baking operations are likely to remain relatively insulated initially, supported by existing grain inventories. However, as higher input costs work through the system, margins could come under pressure; and
• Omnia: The fertiliser business may struggle due to elevated prices, driven by the difficulties in Hormuz, combined with expectations of lower rainfall and only moderate maize prices. This could discourage plantings and reduce fertiliser demand in the coming summer.

Second-order effects are naturally less directly correlated and would only be evident from mid-2027. We view them as follows:

• Food retailers such as Shoprite may benefit modestly as food inflation lifts the value of sales;
• Discretionary retailers such as Mr Price could face some pressure from higher grocery bills, although lower fuel prices should help offset part of the squeeze on household disposable income; and
• Banks may be among the modest beneficiaries if interest rates rise slightly, expanding their net interest margins without causing a material change in bad debts.

A manageable risk

Although current climate forecasts point towards a strong El Niño and an elevated probability of drought across South Africa’s summer rainfall regions, the current pre-event conditions are more favourable than they were a decade ago.

For investors, the mitigating factors described above suggest that while El Niño is likely to influence inflation, interest rates and certain sectors during 2027, its overall impact on the South African economy should remain manageable rather than systemic. DM