Citi analysts have identified a confluence of supply-side risks that are expected to tighten global agricultural markets significantly over the next six to twelve months, with a potent El Niño event and escalating geopolitical conflicts serving as the primary catalysts.

In a report released on August 25, the team led by Chief Analyst Arkady Gevorkyan maintained a bullish outlook on grains and oilseeds, raising price targets for corn, wheat, and soybeans. The bank's analysis points to a combination of a strengthening super El Niño, escalating disruptions in Black Sea shipping, robust biofuel demand, and elevated fertilizer and energy costs as key factors driving the global agricultural supply-demand balance toward a tighter state.

The report also warns that the upward movement in grain and oilseed prices will eventually transmit to broader food inflation. This effect is expected to be particularly pronounced in import-dependent economies, making the agricultural market an increasingly critical arena for inflation-focused investors.

The Super El Niño: A High-Conviction Supply Threat

Citi identifies the developing super El Niño as its highest-conviction risk to agricultural supply. Data from the National Oceanic and Atmospheric Administration (NOAA) updated in August 2026 indicates a greater than 90% probability of a strong El Niño event, with a 69% chance it will surpass the intensity of all previous events since 1950 between October and December. If realized, this would rank among the most powerful El Niño/Southern Oscillation (ENSO) events in modern climate history.

To systematically quantify this threat, Citi has developed the Production-at-Risk (PAR) tracking framework. This model estimates potential output losses by factoring in each country's production share, yield sensitivity to ENSO, event probability, and crop calendar severity. The analysis reveals that current market pricing only reflects a portion of the potential downside risk.

Since the El Niño began developing in March 2026, the commodities with the most significant downward production revisions include Robusta coffee (-4.0%), palm oil (-2.5%), sugar (-2.0%), and rice (-1.5%). However, a notable gap remains between the actual revisions for palm oil, sugar, and rice and their estimated risk exposure, suggesting these commodities face further downgrade risk if the event intensifies as forecasted.

Geographically, the highest concentration of risk is found in Australia (wheat, barley, and canola), India (rice, sugar, and cotton), Southeast Asia (palm oil, coffee, sugar, and rice), and parts of Brazil. In contrast, Argentina stands out as a potential beneficiary, as historical El Niño events have been associated with improved soil moisture in its primary agricultural regions, supporting corn and soybean yields.

Black Sea Disruptions and Geopolitical Conflict: A Direct Threat to Wheat and Corn

The Black Sea region currently presents the most immediate geopolitical risk to grain markets. Recent attacks by both Russia and Ukraine have significantly escalated against ports, grain terminals, and commercial vessels. Ukrainian forces have damaged Russia's key export hub at Novorossiysk, while Russia has intensified strikes on Ukrainian port infrastructure around Odesa. These actions have led to a substantial number of shipowners reducing or suspending operations in the Black Sea, a sharp increase in insurance costs, and a material decline in grain export flows from both countries.

In terms of scale, Russia is projected to export approximately 46 million tons of wheat, accounting for about 20% of global wheat trade. Citi estimates current disruptions could delay or displace 10 to 20 million tons of wheat exports, representing 5% to 9% of global trade. Ukraine, expected to export about 22 million tons of corn (roughly 11% of global trade), could see 3 to 8 million tons delayed, equivalent to 2% to 4% of worldwide volumes.

Regarding the conflict's trajectory, Citi anticipates Turkey will once again act as an intermediary to broker a deal similar to previous agreements, potentially allowing Black Sea trade flows to partially normalize. The report also highlights that a potential blockade of the Strait of Hormuz would have a comprehensive impact on global agricultural production and transport costs by significantly raising prices for crude oil, diesel, fuel oil, and fertilizers. The Gulf region is a major exporter of nitrogen fertilizers, ammonia, and urea, and any related disruption would directly elevate fertilizer costs.

Fertilizer and Energy Costs: A Hidden Constraint on Production

High fertilizer and energy costs represent another significant upward driver for grain and oilseed prices. Citi notes that energy and fertilizers account for 60% of variable costs for US farmers, with even higher proportions in Brazil and Argentina. There are already signals that tightening fertilizer supply is influencing agricultural decisions.

Brazil's soybean planting season is set to begin in early September, but fertilizer imports have fallen 11% year-on-year. This could force farmers to use lower-quality products and curb expansion plans, ultimately reducing yields and total output. Furthermore, as crop fungicides and pesticides are derived from petroleum products, high energy prices limiting their availability could lead to insufficient disease control investments this season, further dragging down yields. The cumulative effect of these cost pressures, combined with El Niño's weather impacts, creates a dual support for higher grain prices.

Biofuel Demand Expansion: A Structural Increment for Grain Consumption

The global push for biofuel policies is providing sustained structural support for corn and soybean demand. In the US, discussions are intensifying around raising the E10 gasoline blending standard to E15 for year-round use, and biomass diesel blending requirements were already increased earlier this year. Citi has consequently raised its soybean crush demand forecasts for the year.

In Indonesia, the biodiesel mandate is accelerating, with the palm oil blending ratio set to rise to 50%. This would divert a significant portion of domestic palm oil production from exports to the energy sector, further tightening global vegetable oil supplies. Meanwhile, Brazil's decision to raise the ethanol blending ratio in gasoline to E32 directly boosts domestic industrial consumption of corn, reducing the country's exportable surplus.

Citi also emphasized the transmission mechanism from palm oil to the soybean market. An El Niño-induced production decline in Indonesia and Malaysia, which together account for about 85% of global palm oil exports, would push up overall edible oil prices. This would prompt consumers to shift toward substitutes like soybean oil and sunflower oil. Increased soybean oil demand would then improve crush margins, stimulating soybean demand and prices, completing a full upward transmission chain.

In summary, Citi believes that with the combined effects of El Niño supply threats, Black Sea uncertainty, tightening vegetable oil balances, and expanding global biofuel demand, the risk balance for grain and oilseed prices over the next 6 to 12 months remains clearly tilted to the upside.