The oil market has rebounded sharply since late January while other commodities including iron ore and many base metals have also moved higher. Yet, this does not appear to have been a cue for agricultural prices to rise. Indeed, according to the UN monthly food index prices are down by 19% over the past twelve months to April and are now at their lowest level since June 2010.
Although oil and many base metal prices have moved higher on signs of a slowdown in supply (i.e. US shale oil producers) and higher demand growth (particularly from China’s construction sector for metals), the fall in the US dollar since the start of the year has also played a part.
Which begs the question why higher oil prices (many crops are very energy intensive), higher demand (China consumes a significant share of the worlds soybeans for animal feed for example) are not combining with the weakening of the dollar to push agricultural commodity prices higher too?
The short answer is strong supply coupled with weak currencies among the major agricultural producers.
Favourable weather in key food producing regions led to the second year of bumper harvests, especially in grains and oilseeds. Take wheat as an example. The US is a big producer and exporter of wheat, but the strength of the dollar has cut wheat exports. On the flip side the weakness of the Euro and further to the east, the depreciation in Ukrainian and Russian currencies, coupled with bumper harvest and low freight rates has spurred wheat production to record levels.
The Brazilian Real has also depreciated sharply since the start of 2015 due to worries about the Brazilian economy. This has incentivised farmers to increase exports, as returns on dollar denominated commodities rise in local currency terms. The country is the world’s largest producer of coffee and sugar and also a big supplier of soybeans.
The poorest agriculture price performers include wheat, arabica coffee (both of which are down around 20%) and lumber (down close to 30%). There are a couple exceptions. Of the 17 exchange traded agricultural commodities only two have posted gains since the start of the year – cotton and rubber. Rubber prices have jumped due to shrinking stockpiles in China but mainly due to efforts by the major producers (Indonesia and Thailand) to restrict supplies. Cotton prices meanwhile have bounced on supply concerns in the US and other major cotton producers.
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