Current Market Fundamentals and Outlook for Global Commodity Prices
John Tobin, Data and Market Intelligence Specialist
A recent webinar held by Bord Bia and delivered by StoneX was designed to share their authoritative thinking in globally traded commodities. The webinar discussed the fundamentals affecting prices of some of the main commodities Bord Bia client companies are purchasing.
Written for busy Irish Food Marketers, this article will provide a brief summary of the webinar in which the following topics were covered:
Dairy Market Briefing
2022 delivered record high milk prices. However, dairy product prices globally have been trending downwards for almost 12 months, with some more recent indications of stability. This downward trend is driven by recovery in supplies and weak import demand from China, and has resulted in farmgate prices for milk declining. It is expected that milk volumes will remain quite strong in the EU through to September before producers’ response to lower milk prices materialises, resulting in volumes falling below year earlier levels in Q4 2023. The delayed response of the dairy supply chain was explained in how the market for dairy commodities peaked in April 2022. Yet EU farmgate milk prices peaked in December, nearly 8 months later. In addition it was highlighted that farmers will need two to five months to adjust to lower prices, hence the response to lower farmgate pricing isn’t expected to materialize until the second half or third quarter of this year.
Looking at the current markets for dairy products traded globally, a big focus was placed on developments in China due to the fact it accounts for 20% to 25% of the globally traded dairy products. Since 2021, Chinese dairy imports have been trending downwards, coinciding with Chinese domestic milk production increasing during this period. Overall, it is expected domestic supplies will grow by 3.5% in 2023 in line with consumption growth, meaning import demand for dairy will remain relatively weak in this region. Outside of China, imports in 2023 in other countries have been increasing, and it is also envisaged that import demand in 2023 will be quite aggressive to take advantage of lower prices on offer on the market place.
With regards to sugar, it was highlighted that growth is expected in Brazilian and Thai sugar production in the current cycle October 2022 to September 2023. This production growth is attributed to more favourable weather in Brazil, along with more product directed towards sugar plants vs. ethanol plants, and lastly in response to higher prices on the international sugar market. For the 2022/23 season, it is expected there will be a surplus of sugar globally of almost 2.5 million tonnes. However, it is worth noting that this surplus represents circa 1% of global productions and follows three prior seasons where the global sugar balance was in a deficit. While prices for sugar traded in London are currently trading at in excess of USD$700 per tonne, having rallied from USD$300 to USD$400 per tonne in 2020 and less than USD$600 per tonne as recent as January 2023, with the cost of energy inputs remaining on sugar plants’ radar in the EU.
Similar to sugar, cocoa prices have also witnessed very bullish trends with prices hitting a six year high in London. This is due to concerns about supply for the major producers and better than expected consumption indicators for 2022. Globally, it is expected there will be a small deficit of cocoa at 60 thousand tonnes which is an improvement on the prior season where the deficit was closer to 300 thousand tonnes. For the most recent two season the global stock to use ratio is estimated to be approx. 33%. In prior years this metric was typically between 36% to 38% suggesting the supply balance of cocoa has deteriorated in recent years.
In addition, with 60% of global supply of cocoa derived from the Ivory Coast and Ghana, this means developments in both of these regions dictates the global supply situation for this commodity. To date poor weather has had a negative impact on deliveries for the first quarter of 2023, contributing to current supply deficit. Meanwhile consumption indicators have outlined that the demand situation was better than expected in 2022, despite the cost of living crisis, with the global cocoa quarterly grindings providing a good indicator of demand from chocolate companies for cocoa products. The next issue of the cocoa grindings report is expected to be launched in April which will be monitored by relevant stakeholders to see if there is a continuation of the strong demand situation in 2023 to date.
Taking a look at coffee, prices were also at historical highs in 2022 as adverse weather has affected the current crop, this coincides with concerns or doubts over global coffee consumption in particular the U.S. (the largest global consumer) where coffee consumption has yet to recover to pre-pandemic levels. In Europe inflation for coffee has continued on an upward trajectory indicating higher coffee roaster costs could continue to be transferred to the end product for some time, while concerns remain globally that higher prices could affect consumption recovery.
Similar to other commodities global wheat prices were noted as being at elevated levels, though they have stabilized since the Ukraine crisis commenced in February 2022. However, regionally there is some significant variances in stocks to use ratio, suggesting some regions are experiencing significantly tighter supply situations with, for example, the EU having 8% of their consumption in stock. While globally, this metric is currently at circa. 34%, which at first glance would suggest the world wheat market is well supplied.
Though, at a more regional level, the opposite is the case, with China being home to half of the world wheat ending stocks, whereas Europe’s stocks to use ratio sits at less than 10%. The implications are such that, China will not be releasing stocks on to the world market as this would compromise their own food security. Looking at the stocks to use ratio for the world less China, sees this metric fall to less than 20% (the lowest it’s been since 2007). In addition, it is outlined that the supply situation from the major exporters is declining and hence the wheat cushion is getting thinner and thinner.
It was acknowledged that wheat prices have declined back to pre-invasion (invasion of Ukraine) price levels, but this is a function of the grain corridor from Ukraine remaining open, which is by no means guaranteed to continue. In conclusion, European wheat prices have the most potential to see prices shoot up, due to how tightly supplied the region is for wheat making it more exposed should the flow of grain from Ukraine be restricted further.
Implications for Irish food, drink and horticulture businesses
A recent report from the IMF has outlined that while commodity prices have moderated since their recent peak, prices still remain elevated with inflationary pressures persisting in the global marketplace. It is important for Irish companies and their management to stay abreast of developments in these markets and to consider the implications effect of price movements up or down could have on their businesses and their consumers. The impact of recent volatility in commodity prices also contributed to rising inflation globally resulting in a cost of living crisis, which may impact economic growth in the medium term (Mohommad et al., 2023). In addition, there is not a common theme across all commodities with the FAO price indices showing prices for meat and sugar on an upward trend since the beginning of 2023. Whereas, the dairy price index is down almost 11% when compared with March 2022, which is driven by declines in prices for cheese and milk powders. Though the FAO acknowledged that butter prices increased on the back of solid demand from Asian countries (FAO, 2023).
It is important a producer / manufacturer is extremely well versed on its own specific cost base i.e. the percentage each commodity accounts for per unit of production and therefore the relative impact of movement in commodity pricing has on a firm’s cost base. Customers will want you to be as specific as possible and speak about your business only as opposed to ‘industry’. It is also important to inform customers of where you have moved to mitigate cost.
Bord Bia has created a suite of resources around negotiation and cost inflation which can be accessed by clicking here, should you want to explore this topic further. For some further related reading around the topic of inflation, see below: Bord Bia’s inflationary impact report can be accessed here.
FAO. (2023, April 7). FAO Food Price Index | World Food Situation | Food and Agriculture Organization of the United Nations. Www.fao.org. https://www.fao.org/worldfoodsituation/foodpricesindex/en/
Mohommad, A., Raissi, M., Lee, K., & Fizzarotti, C. (2023, March 28). International Monetary Fund. Www.imf.org; IMF. https://www.imf.org/en/Blogs/Articles/2023/03/28/volatile-commodity-prices-reduce-growth-and-amplify-swings-in-inflation