31/08/2023
Droughts,
El Niño, wildfires…it’s been a perfect storm for certain soft commodities this year.
Sugar trades around multi-year highs and after a bit of pullback through May/June has been
trading much firmer in the last few days following reports India is expected to ban exports
for the first time in seven years. Chart #1
Source: Refinitiv Cocoa meanwhile is well
priced for weak harvests in Africa and maybe near a peak. Cocoa prices in London soared to
their highest level decades, at least since 1977, with traders citing the heavy rain in West
Africa accelerating the spread of black pod disease, which causes cocoa pods to turn black
and rot. Cocoa Swollen Shoot Virus in the Ivory Coast has also hit production. Grind data
suggests high prices are already resulting in demand destruction, although whether this is
sufficient enough to weigh prices in the near-term remains to be seen. So far the El Niño
does not look as bad as in some previous years, which might spare West Africa’s cocoa
harvests in 2023/24. However whilst higher prices have tended to encourage more planting, EU
rules make this harder today than in the past. Chart #2
Source: Refinitiv
Other softs like olive oil and orange juice have also seen
prices surging this year due to poor harvests. Florida’s been hit hard by storms like
Hurricanes Ian and Nicole, and diseases such as citrus greening hitting its groves.
The crop is the worst in over 80 years
and has seen a surge in orange juice futures, with a notable backwardation in the curve –
with spot prices substantially higher than forward contracts – which could be indicative of
a very tight near-term supply crunch. Bad weather and crop failures have also affected olive
oil prices in Europe, which have hit all-time highs this year.
Chart
#3
Source: Refinitiv
OJ backwardation
Chart #4
Source: Refinitiv
Part of the move in prices is down expectations for the El
Niño weather pattern which has formed this year and could strengthen over the winter. Data
from Refinitiv shows commodity prices peaking a year after El Niño – spot prices might have
further to run if the cold weather and hurricanes further hits the Florida crop.
Earlier this year the National Oceanic and Atmospheric
Administration announced the arrival of El Niño, a weather pattern marked by
warmer-than-average sea surface temperatures in the central and eastern Pacific Ocean near
the equator. It can increase the risk of heavy rainfall and droughts in certain parts of the
world – especially if it’s classed as a strong one as in 2015/16. Droughts hit crops,
forcing up prices, whilst warmer weather in winter can hit demand for heating fuel and
natural gas. The last strong El Niño occurred in the winter of 2015/16 and between the end
of August 2015 and end of September 2016 sugar prices doubled, led mainly by a big drop in
Indian production
.
Chart #5
Source: Refinitiv
Already this year sugar prices are at their highest since
2011 – though in part that is to do with a rally in the Brazilian real, as well as droughts
in Brazil and floods in India. El Niño can also impact output of wheat and rice – India
consumes all the wheat it produces and so a bad crop produces demand for imports in the
world’s most populous country. But El Niño can boost production of things corn and soybeans
in Brazil and the US, sending prices lower.
In the near term, analysts at Citi believe raw sugar prices
will stay high and might test fresh peaks mainly due to expected production difficulties in
Asia and a ban on exports from India. They say cocoa prices are about to peak or have done
so already.
“While a sizable 2023/24 global deficit is already priced
in with sugar trading at close to decade highs, price risks still look skewed towards the
upside as El Niño has already led to erratic weather patterns across key sugar producing
regions in Asia,” the bank said in a report. “Both India and Thailand have
experienced lower-than-normal rainfall recently, which could translate into further crop
downgrades for the upcoming 2023/24 crop year.”
Cocoa is more sensitive to high prices and speculative longs
might start to unwind their positions, whilst Arabica coffee is heading for a surplus next
year, which ought to contain pricing, the bank added.
Neil
Wilson
Chief Market Analyst at Finalto
All
opinions, news, research, analysis, prices or other information is provided as general
market commentary and not as investment advice and all potential results discussed are not
guaranteed to be achieved. The information may have been derived from publicly available
sources, company reports, personal research, or surveys. Past performance is not indicative
of future performance. Trading carries risk of capital loss. Service available to
professional clients only.