Top three commodity trends in February
Foodstuffs are bucking the wider decline in the commodities markets. Price trends are reversing their declines in 2016 as supplies are seen as more uncertain. In February 2017, prices are trending firmly higher on weaker supply expectations. Cereals, sugar and palm oil increased in January for the sixth month in a row.
According to the FAO Food Price Index, foodstuffs were overall 16 per cent higher in January compared to the same period in 2016. Cereals are a six-month high because of reduced wheat production in the United States. Palm oil is at a 30-month high on supply limits in Southeast Asia. Sugar is 10 percent higher than in December 2016. The commodity faces supply limits in the world’s largest producers, Brazil, India and Thailand.
Volatile supplies from emerging economies are partly responsible for triggering an inflationary trend. The resulting impact on food prices and futures is predictable, they are rising in line with the fundamental supply concerns.
Global traders looking to lock in prices at their current levels are moving decisively. Futures contracts are set to rise medium-term, indicating the firming demand. At the time of writing, CME Wheat Futures are set to rise from 422,4 USD for March 2017 expiries, to 538 USD for March 2019 expiries. Sugar Number 11 Futures are set to stay above 20 USD for 2017. Palm Oil futures traded on the Malaysia Palm Oil Council are set to rise from RM3029 for February 1st expiries, to RM 3082 for February 7th expiries.
Increasing demand for cereals
The price increases in cereals appear to have mixed foundations. The uncertain supplies are accompanied by an increase in demand. In 2017, global cereal demand is expected to rise to 2.567 billion tonnes, up 50 million tonnes, forecasts the FAO. At the same time, global stocks are likely to reach record level of 681 million tonnes. It can be argued that the rising price trends could hit resistances when global supplies weigh on investor sentiment. The argument increases in force when you consider the international cereal trade expectations. The FAO expects trade in cereals to reduce by two percent to 391 million tonnes in 2017. With likely stocks at 681 million tonnes and estimated trade at 391 million tonnes, there are prospects of an oversupply in this market.
Sugar vs FX
Sugar is a different story, with exchange rates playing a major role this year. The USD is seen as strengthening against the emerging market currencies like Brazil, favouring buyers. In itself, this is likely to buoy the sugar market, especially considering the lower rates of the Brazilian real to USD. Another boost may come when EU abolishes sugar quotas and India deregulates sugar sales this year. Medium term, demand for sugar is expected to rise by two percent per year, and stocks are expected to fall.
El Nino and palm oil
The demand for palm oil is expected to strengthen throughout 2017 with a few caveats. One caveat is that demand from China may continue to be weaker in the near term. Another is the unknown effect of March’s El Nino on supplies. The breakdown of the TTPA free trade deal is another headwind. Southeast Asian producers have adapted quickly though and are now looking to develop Middle Eastern markets like Iran. Malaysia recently announced plans to open a regional office to distribute palm oil from Teheran as it seeks individual FTAs.
Investment-wise, the markets for sugar, cereals and palm oil look set to maintain their attractiveness, provided traders stay alert to the possible headwinds that lie ahead.