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A Straw in the Wind

August 2016

The recent pullback in agricultural commodity prices seems temporary and there is a probability of high price volatility

The FAO Food Price Index (FFPI), as collated by the Food and Agriculture Organization (FAO) averaged 163.4 points in June 2016, 4.2% higher than in May and 1% below the corresponding month last year. Not only did the June increase mark the fifth consecutive monthly rise in the value of the FFPI, but it also represented the largest monthly increase witnessed over the past four years. Except for vegetable oils, the values of all the commodity sub-indices moved up in June, led by a surge in the price of sugar and more moderate increases for cereals, dairy and meat.
However, soothsayers continue to raise questions on the sustenance of this recovery; the Organisation for Economic Co-operation and Development (OECD) in collaboration with the FAO, in its latest 10-year outlook has said that the recent period of high agricultural commodity prices is most likely over. They underline however, the need to be vigilant as the probability of a major price swing remains high.


Global wheat production, as outlined by FAO’s Cereal Supply and Demand Brief, is now pegged at 732 million tons, more than 1% higher than anticipated in June, mainly due to improved prospects in the EU, the Russian Federation and the United States, as a result of better weather conditions. Prices have continued to trend lower, currently trading at USD 416 a bushel. The price correction since the beginning of the year (USD 470 a bushel) is reflective of the surplus available in the segment; this after a 20% correction in the preceding year.
With year-end stocks estimated at a 15-year high of 216.9 mt, there is little to suggest a change in this trend over the short to intermediate term.

While corn prices saw a 4% rise in the 2nd quarter, they remain volatile and range-bound given the vagaries of weather conditions. The weather in the US, the largest producer and exporter, remains critical to the fortunes of the crop. Prices remain depressed amidst abundant supply.
A far more attractive outlook comes in for Soybean – the crop is up 20% for the YTD. The crop has benefitted from adverse weather conditions in Brazil and Argentina. Demand for final product is providing the impetus on the other side, in particular the demand for soybean oil from China.
Given the same, it is increasingly expected that farmers will likely switch crops in this season given the higher income on acreage when compared to corn.

Raw sugar
The FAO Sugar Price Index averaged 276.0 points in June, up 15% over May. This surge mirrors less positive production prospects in Brazil, the world’s largest sugar producer and exporter, following heavy rains which hampered harvesting operations and affected sugar yields. In addition, as wet weather tends to reduce the amount of recoverable sugar per tonne of cane, larger volumes of sugarcane output were reportedly diverted from sugar to ethanol production, lending further support to prices.

The International Cotton Advisory Committee (ICAC) boosted hopes for cotton prices in a recent report cutting expectations around 2016-17 ending stocks due to lower production. The ICAC lifted its forecast for global cotton prices in 2016-17, as measured by the Cotlook A Index, by 2 cents a pound, to 72 cents a pound. This compares to an average price of 70 cents a pound over 2015-16. The ICAC lowered its forecast for global cotton stocks by the end of 2016-17 by 200,000 tonnes, to 20.4m tonnes. Amongst producers, production in India is expected to rise 8% to 6.3 mt while Chinese production is forecast to fall by 10% to 4.67 mt.

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