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Friday, May 08, 2026

The Trifecta Trade: El Nino, Drought and the Fertilizer Crunch

By Century Financial in 'Investment Insights'

The Trifecta Trade: El Nino, Drought and the...
Hedging Diesel Price Risk- Low-Sulphur Gasoil (LSGO) Hedging Report

Executive Summary

Agricultural commodity markets are facing a rare and dangerous convergence of three simultaneous pressures that are quietly building a structural supply crisis in wheat and corn, the world's two most consumed staple crops.

  • •

    The first pressure is a severe drought gripping the US Great Plains, the core of American wheat production, at the most critical stage of the crop cycle.

  • •

    The second is El Nino, a global climate phenomenon now carrying a 61–94% probability of developing by mid-2026, which is already disrupting harvests across six major exporting nations at the same time.

  • •

    The third is a fertilizer shock triggered by Middle East conflict, which has sent urea prices up 55% since the onset of hostilities, forcing farmers worldwide to cut application rates and accept structurally lower yields for the next one to two growing seasons.

What makes this a compelling investment moment is that the data is already moving while market pricing has not yet caught up. Global wheat output is forecast to fall significantly from last year's record harvest, and further downward revisions remain a live risk as the northern hemisphere growing season progresses. Against this backdrop, wheat and corn stand out as the most compellingly positioned commodities in the current environment.

Wheat Outlook

Synchronized supply deterioration across six major exporting nations, compounded by fertilizer shock and El Nino risk, creates a structurally bullish outlook for global wheat and corn prices.

Global wheat markets are becoming increasingly stressed, with supply problems emerging across multiple major growing regions at the same time. This is not a single country or single weather event driving the concern. Crop conditions are deteriorating simultaneously in the United States, Canada, Kazakhstan, Australia, Argentina, and India. Markets are already taking note, with wheat futures climbing to their highest levels in nearly two years.

Wheat Price Chart
Source: Bloomberg

Bullish case for wheat

01
US Drought

90% of the Great Plains wheat belt under drought stress at critical grain-filling stage

02
El Nino Risk

61% probability of El Nino by mid-2026, threatening harvests across 6 major exporters

03
Fertilizer Crunch

Hormuz disruption drives urea to $700/tonne, forcing farmers to cut application rates

The world is set to produce significantly less wheat this year than last. The International Grains Council now estimates global output at 821 million tonnes, down 24 million tonnes from last year's record harvest of 845 million tonnes. In the United States, crop quality has fallen sharply, with only 30% of the winter wheat crop in good or excellent condition according to the USDA, compared to 49% at the same time last year. With so many major producers struggling at once, the market is heading for a supply shortfall of 6.9 million tonnes in 2026, a significant turnaround from 2025 when supply was actually running ahead of demand.

Section I

US Drought: The Great Plains Under Siege

The most pressing near-term supply risk is the drought currently gripping the US Great Plains, the core of American winter wheat production. The timing is particularly damaging because the dryness has coincided with the grain-filling stage, the period when the crop is most sensitive to moisture stress and when yield losses become irreversible. Any shortfall in soil moisture during this window translates directly into lower output, with no opportunity for recovery before the summer harvest.

Drought now covers nearly 90% of Nebraska and Oklahoma, with more than half of Nebraska classified under "extreme" drought. The dryness follows weeks of scant rainfall compounded by a late-winter heat spell that triggered massive pasture fires across the nation's breadbasket.

"Current conditions rank up there with some of the worst we have seen." (USDA)

The agronomic consequences are stark and quantifiable. Just 30% of the US winter wheat crop was rated "good to excellent" in the USDA's most recent crop conditions report, a dramatic deterioration from 49% at the same point last year. The coming weeks are critical: any further deterioration heading into early summer could trigger a step-change downward in US production estimates, providing a fresh upside catalyst for prices.

US Drought Monitor Map
Source: USDA / NOAA / NASA
Section II

Global Supply Deterioration: A Multi-Region Phenomenon

What elevates this beyond a US-specific story is the breadth of supply weakness now visible across major exporting nations. The common thread is El Nino, a climate phenomenon that drives extreme and erratic weather globally, pushing some regions into severe drought while flooding others with excess rainfall, often simultaneously. Critically, the regions most vulnerable to El Nino conditions overlap directly with the world's most important wheat growing areas. NOAA's Climate Prediction Centre currently assigns a 61% to 94% probability to El Nino developing by early summer 2026, and its effects are already registering in crop output across multiple continents. The production revisions below reflect the scale of damage already underway.

Country 2026 Forecast 2025 Actual Change (MT) % Change
Canada 35.8 – 36.2 mt ~40.0 mt –3.8 – 4.2 mt –10 to –11%
Kazakhstan 15.6 mt 19.8 mt –4.2 mt –21%
Australia ~31.7 mt ~39.1 mt –7.4 mt –19%
Argentina 20.0 – 20.2 mt 27.8 mt –7.6 – 7.8 mt –28%
India 106 – 111 mt ~113 mt –2 – 7 mt Revised down
Source: StoneX and Bloomberg

European conditions remain relatively constructive, with France reporting 83% of its crop in good-to-excellent condition; however, analysts are flagging heat and dryness during the flowering stage as a meaningful tail risk that could bring European supply into the bearish column.

6.9mt

Structural wheat deficit projected for 2026.

While global markets recorded an oversupply last year, the synchronized contraction in production against stable consumption flips the balance sheet to a meaningful deficit. Further downward revisions remain a live risk as the northern hemisphere growing season progresses.

Section III

Fertilizer Shock: The Strait of Hormuz as an Agricultural Chokepoint

A secondary but structurally important bullish driver is the disruption to global fertilizer supply chains following US and Israeli strikes on Iran. The Strait of Hormuz is not merely an energy chokepoint; it handles critical shares of global fertilizer trade, and its closure has transmitted directly into farm-gate input costs.

Urea price since onset of conflict
$420
per tonne
Pre-Conflict
+55%
$652
per tonne
Current
Urea prices have surged following disruption of Middle East supply routes through the Strait of Hormuz, which handles approximately 40–50% of global seaborne urea trade. Higher input costs are forcing farmers to cut application rates, compounding yield risks over the next one to two growing seasons.

The Strait of Hormuz handles approximately 30% of global urea trade and 20% of global phosphate fertilizer trade, with 40–50% of global seaborne urea originating in the Middle East. With these flows disrupted, fertilizer prices have surged sharply, forcing farmers across major wheat growing regions to cut application rates and accept lower yields.

The consequences for wheat production are twofold. In the near term, some farmers locked in input costs prior to the price spike, providing a short-term buffer on margins. Over the medium term, elevated fertilizer costs are prompting farmers to reduce application rates. Lower fertilizer use directly translates into lower crop yields, meaning the supply damage from this shock will compound through the next one to two growing seasons, not just the current one.

US Great Plains farmers are already cutting back on fertilizer applications in response, colliding with an existing drought that is already stressing crop development. The combination of reduced inputs and adverse weather creates a multiplicative downside risk to yields that is not yet fully priced into current supply estimates.

Section IV

Wheat – Cash

Hedging Diesel Price Risk- Low-Sulphur Gasoil (LSGO) Hedging Report
Source: TradingView Timeframe: Daily Date: 1st May 2026

Wheat is trading at $624.7 and has broken out of a 2-year base formation. It is also close to retesting the breakout level at $616.43. It also broke above its 200-weekly EMA level at $583 recently, indicating strong bullishness on a longer timeframe.

The next resistance is observed at the $707.5 level, followed by the $940 level. During the Russia–Ukraine war in 2022, it reached a high of $1270, as Russia is a significant producer of wheat.

Conversely, a support is observed at the $616.43 level, followed by the 9-day SMA at $617.

Corn Markets: Compounding Shocks

Supply

Corn faces its own constellation of bearish supply drivers, distinct from wheat but similarly rooted in the fertilizer shock and El Nino risk. Urea, a nitrogen-based fertilizer derived from natural gas, has nearly doubled in price, reaching $652 per tonne. Corn is the most fertilizer-intensive major cereal crop, making it acutely sensitive to input cost spikes. The USDA estimates US farmers intend to plant 95.3 million acres of corn in 2026, down 3% from the prior year, and nearly 40% of US corn farmers still lack adequate fertilizer supplies according to the National Corn Growers Association.

Coming into 2026, corn futures were trading in the $4.40 to $4.60 range before the Iran conflict escalated. Since then, prices have pushed sharply higher toward $4.80 per bushel, as rising energy and fertilizer costs feed directly into production expenses, putting both acreage and yields under pressure.

Brazil, accounting for approximately 10% of global corn production, is highly exposed through its safrinha crop in Central Brazil. This second-season crop grows during the drier part of the season and is acutely vulnerable to El Nino-driven rainfall disruption. UN data indicates the 2023–2024 El Nino reduced Brazilian corn yields by 10–20%. South Africa and Central America, together representing around 6% of global production, face similar exposure.

Corn Price Chart
Existing Supply

The latest USDA WASDE (April 2026) places US corn ending stocks at approximately 2.1 billion bushels, elevated by historical standards. However, USDA baseline projections do not fully incorporate potential downside risks such as localised adjustments to fertilizer application, shifting acreage decisions toward lower-input crops like soybeans, or geopolitical disruptions affecting input logistics.

Demand

The EPA's 2026–2027 Renewable Fuel Standard maintains conventional ethanol blending at 15 billion gallons annually, providing a policy-backed floor for corn demand. The rule is projected to create approximately $31 billion in value for US corn and soybean oil in 2026, roughly $2 billion more than in 2025, and is expected to foster a $3–4 billion increase in net farm income. Additionally, around 70% of small-refinery-exemption volumes from 2023–2025 are being reallocated, further tightening blending requirements and strengthening visibility into domestic biofuel demand.

Taken together, tightening supply and a policy-anchored biofuel demand floor create a favourable backdrop, skewing corn prices toward a bullish bias on any further deterioration in growing-season conditions.

Fertiliser Crunch

Fertilizer costs have surged far beyond what farmers are earning from their crops, creating a serious squeeze on profitability. Since the start of the year, the price of diammonium phosphate (DAP), a key crop nutrient, is up 16%, while urea, another essential fertilizer, has jumped 67%. Corn prices, by contrast, have risen just 5%, meaning input costs are rising more than twelve times faster than the crop price farmers receive in return.

To put this in practical terms, in the third quarter of 2025 a farmer needed more bushels of corn than ever before on record just to buy one tonne of DAP fertilizer. Potash also exceeded its ten-year average affordability level. In short, growing crops has rarely been this expensive relative to what those crops can be sold for, and that dynamic is already causing farmers to cut back on fertilizer use, which will directly weigh on yields in the seasons ahead.

Fertilizer Price Chart
Source: Bloomberg
Technical Analysis

Corn – Cash

Corn Price Chart
Source: TradingView Timeframe: Daily Date: 1st May 2026
  • Corn is trading at $464.7 and has broken out of an almost 1-year base formation. A decisive close above the 200-week EMA at $465.8 will confirm further bullishness in the commodity.
  • The daily RSI is also trending upward, indicating strong momentum. The next resistance is observed at the $485 and $500 levels, which could likely be tested if bullish momentum continues.
  • When oil prices peaked during the Russia–Ukraine war in 2022, corn reached a high of $820. Conversely, a near-term support is observed at $459, followed by the 9-day SMA level at $457.
Risks and Assumptions related to Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
The back-tested strategy might be at risk of data dredging, which is the behavior of testing multiple hypotheses at one time, resulting in picking the data that best supports your main hypothesis.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.
A trading strategy that performs well on multiple datasets from one market (e.g., forex) might not perform as well in another market (e.g., stocks).
The strategy may not depict accuracy in terms of spread changes due to the spread-widening events.

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