By Michael Brush
A looming climate shock threatens to drive up global commodity prices. These investments can help protect your purchasing power.
A forecasted &#34;super&#34; El Niño could severely disrupt global crop yields and keep inflation higher than expected.
Analysts warn that a severe El Niño could raise global food commodity prices by up to 9%.
Many investors think elevated U.S. inflation is poised to come down once an end to the Iran conflict opens the Strait of Hormuz, reducing energy prices.
They're in for a bad surprise - and their portfolios will likely suffer as a result. That's because a looming, powerful El Niño is expected to pick up where the Iran conflict leaves off.
A strong El Niño would disrupt crop production, sharply driving up agricultural commodity prices. &#34;The phenomenon tends to raise global food commodity prices by up to 9%,&#34; say analysts at Marex, a financial-services company specializing in energy and other commodities.
Inflation will continue to be a problem, and you need to position your portfolio accordingly.
Flooding and droughts
Wheat, rice, cotton, sugar, cocoa and palm-oil production may be hit the hardest.
An El Niño is the warm phase of the El Niño-Southern Oscillation (ENSO) climate pattern in the tropical Pacific Ocean. It boosts temperatures and precipitation and causes flooding and droughts in much of the world.
The National Oceanic and Atmospheric Administration (NOAA) puts the odds of an El Niño this year at more than 90%, and it gives a 1 in 4 chance that it will be a extremely powerful El Niño.
Weather forecaster Joe Bastardi at WeatherBELL Analytics said in an interview that changes in air pressure in the central and western Pacific suggest the El Niño has already started. Like NOAA, he says there's a good chance of a &#34;super&#34; El Niño, like the one in 1997-98. That one caused significant crop damage.
Wheat, rice, cotton, sugar, cocoa and palm-oil production may be hit the hardest, Marex analysts wrote in a recent report called &#34;El Niño and Agriculture: Weather Shocks, Supply Risk and Market Pricing.&#34; Previous El Niño events significantly drove up wheat and rice prices by reducing yields in Australia and the Russia-Ukraine-Kazakhstan region.
One knock-on effect might be that farmers plant less for fear of losing crops to a strong El Niño, making its impact on ag commodity prices a self-fulfilling prophecy, Marex says.
A strong El Niño would disrupt crop production at a time when yields are already challenged by usual weather patterns, says Chris Faulkner-MacDonagh, a portfolio manager who closely monitors inflation trends as part of T. Rowe Price's global multiasset team. &#34;The El Niño is going to be very bad this year, and there are spots in the United States already suffering from a drought,&#34; he told me in a recent interview.
Here are two other factors driving up inflation:
1. Disinflation is scarce: Counterintuitively, big price gains in food and energy are not the real cause of excessive inflation, Faulkner-MacDonagh says. Instead, the absence of disinflation is the culprit. &#34;Disinflationary pressures are as low as during the 1970s,&#34; he said. The U.S. economy, therefore, is &#34;positioned perfectly for an inflation storm.&#34;
There's no disinflation in part because China has been cutting manufacturing capacity to support prices. This policy is driving up manufacturing costs for domestic and foreign producers. Next, the big data-center buildout has put an end to persistent tech-sector disinflation, by dramatically driving up the prices of DRAM and other tech components.
Read: Your next videogame console could cost $1,000 - and it has nothing to do with better hardware
2. Oil prices might not decline as quickly as expected: Energy analysts at Jefferies point out that the futures markets suggest oil prices (CL00) (BRN00) will remain $10 to $15 per barrel above pre-Iran war levels for the next couple of years, as you can see in the chart below.
The bottom line: Faulkner-MacDonagh expects that inflation will continue to rise this year before it settles at a level above where it is now. Though not a part of his economic outlook, an inflation surge into the 8% to 9% range over the next 12 months would not be surprising, he says.
These moves can position your portfolio for persistent, elevated inflation:
1. Own commodities: For example, the Harbor Commodity All-Weather Strategy exchange-traded fund HGER has a decent record of outperformance. Over the past three years, it has produced 21% annualized gains, according to Morningstar Direct, compared to 16.1% for its broad-basket commodities category and its benchmark Bloomberg commodity total-return index. The $3 billion ETF's portfolio is rebalanced once a quarter based on where its management believes the highest inflation will occur.
2. Own agricultural-sector companies: First Eagle Investments portfolio manager Benjamin Bahr singles out Canada-based Nutrien (NTR), the world's largest fertilizer producer. He also likes Deere (DE) because its equipment helps farmers be more productive and save on labor.
3. Own gold: Gold (GC00) can help investors preserve purchasing power. Consider getting exposure to the metal via an exchange-traded fund such as SPDR Gold Shares GLD. Bahr at First Eagle singles out companies that receive royalties or the right to buy a portion of miners' gold production in exchange for providing capital. These companies give you exposure to rising gold prices with less risk of mining operational challenges, like rising costs; examples include Franco-Nevada (FNV) and Wheaton Precious Metals (WPM).
4. Own real estate: Real estate often holds its value during times of high inflation. One way to get exposure is to own real-estate investment trusts. American Assets Trust (AAT), for example, has strong insider buying: Founder, executive chair and major shareholder Ernest Rady recently bought $10 million worth of stock at prices up to $23.59 a share. Founder-run and founder-buying are both positives. American Assets Trust owns a mix of retail, office, multifamily and mixed-use properties in California, Washington, Oregon, Texas and Hawaii.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested AAT in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks.
More: The great gold myth: Why the precious metal isn't the war hedge we're told it is
Also read: BofA sees 'red flags' in the U.S. stock market. Here's what to buy now.
-Michael Brush
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
06-08-26 1537ET

HGER

A forecasted 'super' El Niño threatens to disrupt global crop yields, potentially raising food commodity prices by up to 9% and sustaining high inflation. Combined with scarce disinflationary pressures from China's manufacturing cuts and tech demand, inflation may surge to 8-9%. Investors are advised to hedge against persistent inflation by owning commodities, such as the HGER ETF, and agricultural-sector companies like Nutrien and Deere.

Dow Jones

Deere

Nutrien

An inflation storm is brewing in the Pacific Ocean - and your portfolio isn't ready