Crude returns: How low oil prices have broken the relationship to food prices

Until recently, the price of crude oil and food moved largely in tandem. Since 2005 the correlation coefficient between the two price series (sourced from the IMF) has been +0.84. However, since late 2014 food prices have significantly outperformed crude oil prices.

Chart: Crude oil versus food prices


Note: The IMF food price index includes cereal, vegetable oils, meat, seafood, sugar, bananas and oranges while their crude oil price index is an average of Brent, WTI and Dubai.

Energy is a vital component of a farm’s operating costs. Direct energy consumption includes the use of diesel, electricity, propane, natural gas and renewable fuels for activities on the farm. Indirect energy consumption includes the use of fuel and feedstock (especially natural gas) in the manufacturing of agricultural chemicals, such as fertilisers and pesticides. read more

Bacon futures: Less sizzle

This week the World Health Organisation (WHO) labelled bacon, salami and sausages as “Group 1” carcinogens, in the same category as cigarettes and asbestos. The WHO’s new labels appears to cast hamburgers as even more dangerous than was previously thought.

Despite the scary looking chart below the impact on hog futures has been quite muted. The WHO announcement could only have been responsible for that very last leg down, on the far right hand side of the chart, and this only brings hog future prices back to February 2015 levels. read more

Livestock prices: The top 10 most important drivers

This is the second in a series of articles looking at the top 10 most important drivers behind some of the main commodity futures prices. Episode 2 looks at livestock.

1) Feed prices

If feed grain prices increase (so that total input costs rise) the cost of raising livestock also goes up, reducing margins for farmers. Rather than feed cows, pigs and chickens at flat to negative operating margins, livestock owners may opt to slaughter more of their herd instead.

This then supplies the market with excess meat and drives prices lower in the short-term. In the long-term, equilibrium in operating margins is restored by either greater supply of feed grains driving input prices lower or decreased livestock production increasing market prices. read more

Sugar prices: The top 10 most important drivers

This is the start of a series of articles looking at the top 10 most important drivers behind some of the main commodity futures prices. Episode 1 looks at sugar.

1) The Brazilian Real

Brazil is the largest producer of sugarcane, producing around 740 Mt in 2013, almost 40% of global output. A decline in the value of the Brazilian currency, the real increases the incentive for Brazilian farmers to increase output for export while at the same time reducing their production costs.

Millers in Brazil can crush sugarcane to make ethanol for the domestic fuel market, priced in reals, or sugar for export, priced in dollars. A decline in the value of the real versus the dollar encourages Brazilian producers to divert more to the export market. read more

“You can’t just turn cows on and off”

An article in the WSJ highlights how over optimistic expectations over Chinese demand growth helped contribute to the current lull in commodity prices we are seeing. In this article they show how strong Chinese demand growth for dairy products soared between 2008 and 2013 prompted farmers in New Zealand to ramp up production to to supply the growing demand.

“Chinese imports of whole dry milk powder soared to 619,000 metric tons in 2013 from just 46,000 in 2008, according to U.S. Department of Agriculture data. Farmers in New Zealand ramped up production to supply the growing demand, adding 450,000 metric tons of capacity during that stretch, an amount that is equal in weight to about one billion 16-ounce milk containers.” read more

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


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? read more