The Rise and Rise of Global Food Consumption and the Possible Effect on Markets

admin — Sun, 25 Sep 2011 18:20:57 +0000

Since June last year, we have seen some amazing runs in both the soft commodity and grain markets, with many reaching multi-year highs. So what has lead to these intense price rises and are they able to be sustained? Or are we seeing a ‘bubble’ that could prove to be a particularly lucrative short trade?

The meteoric rise in food costs

We recently heard from Roman Hohl, Head of Agriculture at Swiss Re, who advised soft commodity prices will rise 40% over the next decade. BHP Billiton possibly shares an identical view, given its bid last year for PotashCorp, which in effect is a bet on rising food costs. With the world population envisioned to grow to 8.3 bill by 2030, world food demand is anticipated to extend by Fifty percent. So if we’re looking at the basics, they support a sustained move higher over the long run.

Let’s take a look at the moves from June, where charts for most commodities start at the bottom left and are now near the top right :

Wheat has been a clear fave, having rallied over Fifty percent from June to highs of $9.25 per bushel on Nine Feb. Recent volatility has been driven by the spate of worldwide calamities ( the extreme flooding in Australia and parts of Canada as well as droughts in China, Russia and Ukraine ) that have wiped out giant portions of crops.
Cotton traded above $2.00lb for the first time ever. Increasing world expansion boosted requirement for garments, as China’s apparel exports lifted 34% in January. Cotton’s rise of over 140% from June has been intense and on a bunch of occasions, it has reached its daily exchange limit.
Coffee rallied to the highest level since 1997, to be up around One hundred percent from June.
Sugar increased 111% to a high of $33.11lb, even though it has pulled back on speculation that global output will exceed demand.
Cocoa jumped to a 32-year high reaching $3511m / t as political disturbance in the Ivory Coast caused traders to believe production would be influenced.
Are the moves sustainable?

Whilst the above commodities have all had impressive rises, they’ve been for many different reasons, so the short and long term price action could have varying outcomes.

Demand and supply

One commodity that stands out is cotton. Prices are already up over 40 percent this year and it’s trading above most analysts’ 12-month price objectives. Elementals support costs with China expected to buy 47 million bales, exceeding output by 17,000,000, which should push stockpiles to their lowest level since 1996. Like wheat, output has been reduced due to flooding in Australia and other bits of the planet. However, one can not help but wonder how much hopeful cash has already gone into these commodities. In the short term, they became extremely ‘over crowded’ trades. This can see costs stabilize or even head strictly lower, particularly with record crops expected to be planted this year.

Sugar has just lately had a pullback from its February highs. There is a strong deflection in views with Queensland Sugar Ltd suggesting that sugar exports from Australia could be less than outlook given the floods and cyclone that hit the east coast. Having a look at a rather more world stance, increases in acreage in Brazil and India could see a surplus of sugar this year, which may be negative for prices.

Will central banking organizations and govts intervene?

The fact is, regimes ( in both emerging and developed economies ) have begun to pay attention to the higher food costs. They will not sit by and watch them cause inflation or perhaps social unrest. Central banks and states may interrupt and look to keep these commodities stable – perhaps by getting farmers to increase output. The different weather patterns, which have caused the spikes, would possibly not be around next year, so we could easily see any increase in production having a genuine effect on pushing prices down. What is certain though is that there’s both a powerful demand from China and the global population is growing. These elements could push costs higher over the long term. In the short term nevertheless prices have had a robust run and net long positions have been stretched.

Tensions in the Middle East

Both soft commodities and grains are reacting not solely to weather-related supply issues, but also to the generally accepted effect on demand caused by the tensions in the Middle East. It has been, and may continue to be, a unstable ride with increased levels of speculative funds exaggerating moves on each headline.

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The Rise and Rise of Global Food Consumption and the Possible Effect on Markets

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