Have global food prices now reached a trough?

Global food prices fell to their lowest level since September 2009 in May according to the UN Food and Agriculture Organisation’s (FAO) food price index. The index fell 1.4% from April and is now down 22.4% since May 2014.

Chart: UN Food Price Index

2015-06-04_1832

Source: UN FAO

High global production, cheaper crude oil and the strong US dollar (particularly against many food producing economies, e.g. Brazil) have pressured food prices over the past year.

Related article: Why are agricultural commodity prices so weak in 2015?

Investor appetite for agricultural futures is suffering with hedge funds bearish bets hitting record highs, perhaps indicating that prices are now oversold. Could global food prices have now reached a trough?

There are tentative signs that it could.

The FAO forecasts that global cereal production will hit 2.524 billion tonnes in 2015-16, compared with its previous forecast of 2.509 billion tonnes. The higher cereal forecast is mainly due to larger than expected harvests in Africa and North America, but with 2015-16 output still expected to be 1% lower than last year’s record harvest. Cereals stocks at the end of the 2015-16 season are forecast to reach 634.3 million tonnes, compared with 646.5 million tonnes in 2014-15. Still very high by historical standards.

Societe Generale sees prices for many agricultural commodities rising above what the futures curve alone might indicate. The bank forecasts that corn will rise back above $4 per bushel early next year, up from $3.62 per bushel now. SocGen highlight the trend for years with record yields, like 2014, to be followed by poorer results while forecasting higher feed use for 2015-16 than the US Department of Agriculture has penciled in.

Crude oil prices have rebounded since the late January lows which should give some support to agricultural commodity prices. But with oil remaining vulnerable to further weakness going into the second half of 2015 its impact is likely to be muted.

The Brazilian Real since March after suffering a sharp decline against the dollar and many other currencies over the past year. This increased the incentive for Brazilian farmers to increase output for export. SocGen see sugar prices (perhaps the commodity most closely correlated to movements in the Brazilian currency) rising back to 14 cents per lb by the first quarter of 2016 with the bank seeing a continued rise in Brazilian use of ethanol shaving “some of the excess sugar off the global balance”.

The likelihood that El Nino returns may also prompt higher agricultural prices. But with grain stock levels so high the impact is likely to be limited.

Related article: Bumper harvests to curb El Niño impact on food prices

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