Freak Weather Pushes Soft Commodities Markets Higher
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There is a buzz around soft commodities at the moment; largely focussed on corn, wheat, soy bean and the price volatility of those markets.
Soft Commodities, Weather and the Arab Spring
In commodities spread betting, seasonal factors have always been a big driver of food prices, particularly in recent years where floods, drought and other natural events have seen sharp moves up, as well as down, in soft commodity prices.
Case in point, corn prices in the last 3 weeks have jumped 50% to their highest levels in 10 years, as has soybean meal prices.
Last year’s Arab Spring has in part been attributed to sharp rises in sugar, wheat and corn prices, which prompted widespread protests across the Middle East and Africa.
Populations are becoming increasingly frustrated at corruption on the part of governments, and rising food prices tend to be the straw that breaks the camel’s back.
Disaffection is now spreading from emerging markets where food staples make up a much higher percentage of disposable income to more developed economies where money printing by central banks is having the unintended consequence of also pushing commodity prices higher.
Since 2008, the prices of food staples like corn, wheat - and to a lesser extent soybean - have fluctuated wildly, as they have doubled as well as halved in price.
This volatility has been largely driven by seasonal factors and wild weather, though politicians would like people to think that speculation plays a large part as well simply because it diverts attention away from their own inadequacies and policy failures.
Soft Commodities: Emerging Markets
Part of the problem has been the scarcity of arable land set against rising food needs through the rise of a growing middle class in emerging market economies.
The growth in countries like Brazil, India and China will likely see demand for these food staples rise in the coming years. Governments will have to make hard decisions about how they meet the needs of their populations in a world that appears to be growing rapidly, while susceptible to ever growing extreme weather events.
Since 2008 extreme weather events have become more of a norm with proponents of climate change urging world leaders to develop new methods to decrease the world’s reliance on fossil fuels.
Soft Commodities Trading: Biofuel Production with Corn
Unfortunately some of these new methods are part of the problem certainly with respect to the use of corn. The use of biofuels as an alternative fuel source has had a marked effect on demand for corn.
According to a study two years ago by the Earth Policy Institute, 15% of US corn production is set aside for biofuel production and the amount of grain required to fill a petrol tank of an SUV is sufficient to feed one person for one year.
Politicians will have to push back on their green lobby by asking whether this particular trade-off is acceptable in a world where over 1 billion people in the world go to bed hungry every single night.
Corn Supply and Demand
Set against this background and the fact that corn is also used as feed for cattle, it is not hard to see why food price shocks are likely to become a fact of life from here on in. This come as supply chains get tighter and tighter and arable land becomes more sought after.
This year’s drought in the US, the worst since 1956, continues to hit soya and corn crops and further erode inventories while the Black Sea region and a lack of rain in South America is also hitting crop yields.
Over the last four years the volatility in corn prices is shown in the chart below, and this volatility remains largely driven by supply and demand, though deliberate weakening of the US dollar by central banks certainly doesn’t help.
Corn Candlestick Chart
According to the latest USDA report in July it showed US corn yields at their lowest levels since 1988.
Soft Commodities Spread Betting: Rice
The only food staple so far insulated from this sharp rise in food prices is rice, a big staple in both poor and rich regions of Asia.
Rice prices have been relatively stable in the last two to three years e.g. see the rice chart below. However if bad weather affects the price of rice then food problems in the world could get even worse.
If we are facing a food crisis, it is worth considering the additional ramifications, humanitarian as well as in global markets, if rice is impacted.
Rice Candlestick Chart
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Soft Commodities Spread Betting: Wheat
To illustrate the volatility in grain prices, a quick look at the wheat chart below gives plenty of food for thought.
In 2008, prices hit record highs of $13.50 a bushel before dropping sharply back to $4.25 a bushel at the beginning of 2010.
Within twelve months we saw the price more than double and it was this doubling in price to levels nearly $9 a bushel that prompted the Arab Spring in early 2011, before prices began to slip back again bottoming out in mid-2011 around $5.80.
Wheat Candlestick Chart
Since then, prices have moved above their 2011 highs, once again raising fears of further unrest in countries where food prices make up a much larger proportion of the everyday spend of ordinary people.
In countries in the Middle East, food can make up 80% of a person’s everyday budget.
Soft Commodities Spread Betting: Outlook
With governments in Europe and the US looking to balance their budgets with spending cuts and households finding their budgets being eroded by inflation, any move higher in fuel and food costs is likely to be magnified by any price move higher.
This may be less of a problem in more developed economies where food price rises are more of an irritant, however, in the more indebted peripheral countries like Greece that could well change, and prompt more social unrest.
Global governments will have to confront huge social challenges as demographics change in emerging markets and demand for fuel and food continues to increase.
How they deal with these challenges will determine how volatile food prices become over the coming years and how quickly these prices continue to rise, which they surely will, if global weather continues to be as unpredictable as it has been in 2012.
Original article written by CMC Markets as of 20 July 2012.
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'Freak Weather Pushes Soft Commodities Markets Higher' edited by DB, updated 20-Jul-12
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