The current price spikes witnessed across various agro commodities are a combination of diverse factors-- new covid epicenters, labor shortages, supply chain disruptions, political instabilities, natural calamities, energy crisis, etc. As per Drip Capital’s internal analysis, the covid induced unpredictability, along with constantly rising demand and speculations around the supply of primary goods, is the triad responsible for the volatile prices seen across staple agricultural commodities like soybean, corn, cotton, sugar, etc.
On October 25, 2021, the Bloomberg Commodity Index (BCOM), a financial benchmark designed to provide diversified exposure to physical commodities via futures contracts, peaked at US$ 105.8, a six-year high. On the contrary, throughout 2019, before the coronavirus shook the world, the index averaged just close to US$ 80. Interestingly, the World Bank too significantly increased its forecasts for many agricultural commodity prices in their October 2021 release compared to the October 2020 release (See figure below). Market sentiments during the depths of the pandemic were starkly different from what they are in 2021.
According to the US Bureau of Labor Statistics (BLS), the consumer price inflation rate surged to 6.2% in October 2021, the largest 12-month increase since the period ending November 1990. While energy costs recorded the biggest gain (30% vs. 24.8% in September), part of this upward pressure came from food (5.3% vs. 4.6%, the highest since January 2009), namely food at home (5.4% vs. 4.5%).
This becomes evident when we look at the subindices under the agriculture index (See figure below). While the raw materials and beverages index has not increased significantly, the food index has risen by almost 35% since December 2019. Astoundingly, the fertilizer index is up a staggering 113% for the same period. Urea, a commonly used inorganic fertilizer, costs almost US$ 613 per metric tonne, up from the usual US$ 200-300 range seen in the last eight years.
Overall, this is going to increase the input cost for all crops significantly as farmers commence the new sowing season. This could mean that while basic food products are already more expensive, they might continue to be so in the following year. And, if farmers take the risk of holding out before buying for the next growing season in hopes that costs come down, they could end up purchasing at even higher prices. Also, in order to reduce costs, they could either cut application rates or eliminate fertilizers entirely, hoping for lower future pricing or reduce other farm products to account for the bigger expected spend. These risks could further lead to a deteriorated quantity and quality of crop yield and continued shortages.
Agricultural Commodity Market Prices
Our research further included a list of agricultural commodities that exhibited significant volatility over the last two years. Since December 2019, corn futures, which are traded on the Chicago Board of Trade (CBOT), are up by over 50% --US$ 5.7 per bushel (See figure below). Going forward, rising crude oil prices are one determinant that could reverse the downward pressure on corn prices towards the usual US$ 4/bushel average.
Even cotton prices are on a high. Cotton futures on the Intercontinental Exchange (ICE) have been up almost 80% since December 2019. They are trading around the $1.2 a pound handle after ten years, primarily due to tight supplies. In India, the attack of pink bollworm pests has raised concerns over reduced supplies, prompting the Cotton Association of India (CAI) to predict a 38% drop in exports in the 2021-2022 season. While its reserves will mainly determine the commodity’s prices in 2022, the level of apparel demand from Europe will also be an essential factor.
On the other hand, soybean futures traded on the CBOT are up almost 40%, compared to the US$ 9/bushel average during H1 2020. The soybean prices in May this year went up to US$ 16.2/bushel, the first time in eight years. However, the current market sentiment seems to be that prices will revert to the average of US$ 10/bushel, usually seen by the end of the year. The only potential factor now that could drive up this market is a jump in Chinese demand should the country decide to hold up to the promises they had made in the trade deal with the former US government.
Sugar futures on the ICE have risen more than 50% since December 2019. They are trading around 20 cents per lb, close to levels not seen since early 2017. Globally, stakeholders in this industry are expecting lower supplies owing to poor weather conditions.
Pandemic Effect
Covid-19 also led to major structural changes in buying patterns, thus affecting the agricultural commodity prices today. Due to the pandemic-induced uncertainty and unevenness, buyers preferred buying at the rates offered in the spot market rather than entering into long-term contracts. Sometimes, even suppliers were compelled to back out of their contracts when spot prices were much above contract prices.
Overall, in the past year, covid-19 and the resulting shipping crisis brought about a massive challenge for small and medium-sized enterprises (MSMEs), who were trying to stay afloat and continue business as usual. Processors who were buying agricultural produce, processing it and then selling it struggled because they were impacted by prices across all markets- the buying and selling side. But, larger companies that possessed infrastructure, from plantations, processing plants to warehouses, etc., could procure for the entire year, store the crops during the downtime and utilize the stocks when demand increased. The larger hold a business had on the entire supply chain, the easier it was to survive covid-19 and unfortunately, MSMEs were stretched to their fullest capacities.
To conclude, the agricultural commodity prices across many markets had rallied in the first half of 2021, and some are still rising. But, as supply catches up, stocks are replenished and socio-economic conditions stabilize, speculative behavior will start normalizing.
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