Forecasters believe higher production and less speculator interest will lead to lower prices this year. Just don’t mention the weather
Expect the unexpected - 2011 proved this is an enduring truism of the global commodities trade. From the Arab Spring and La Niña to the Eurozone débâcle and the Ivory Coast election crisis, markets shook under a mixture of extraordinary political, economic and weather-related events - and prices soared.
The UNFAO reported the highest food prices since records began in 1990, with its food price index averaging 228 points in 2011, up 23% on 2010 and exceeding the previous record of 200 points in 2008. “In 2011, the unexpected really did happen,” says Jack Watts, analyst at the Home Grown Cereals Authority. “Normally, you’d expect to see perhaps one of these kinds of events a year, but the last two years have gone against that in terms of the sheer number of weather events and the volatility in the currency markets.”
Yet although average prices for many commodities were unusually high in 2011, the most significant spikes were in the first half, with prices falling notably in the second half.
So can we expect prices to continue to fall in 2012 or should the industry brace itself for a third year of spectacular hikes? In short, the outlook is more positive, with increased production and lower demand expected to lead to lower prices for most raw materials.
“Over the past two seasons, farmers have managed to accumulate strong cash returns on the back of elevated prices and manageable fertiliser costs,” Macquarie Bank says in its latest commodities forecast. “As such, we expect 2012 to be a year of positive supply response as producers around the world invest in their crops.”
Take maize. One of the key risers of 2011 - prices stood at $7.32/bushel in the second quarter before tailing off in the second half - average prices for 2012 are expected to remain below 2011’s highs. Macquarie predicts maize will trade at an average of $6.18 for the season from September 2011 to August 2012 before falling to an average of $4.85 for 2012/13. The forecasts may seem counterintuitive, given concerns over dry weather in South America have led prices to rise in recent weeks.
But Macquarie predicts these hikes will be limited to early 2012 and prices will start falling once producers in the Black Sea area start selling maize to international markets from the second quarter of 2012. Even more importantly, the US is expected to produce an additional 40 million tonnes this year, which should lead prices to fall even further in late 2012.
Commodities experts also expect to see reduced interest from speculators in agricultural commodities in 2012, which could reduce the risk of extreme spikes. “Flight to safety has become a common catchcry in 2011 and, given the ongoing macroeconomic uncertainty, risk aversion may well continue to be a key theme in 2012,” says agricultural lender Rabobank.
The bank is predicting lower prices for agricultural commodities this year - for example, it is forecasting wheat at an average of $6.09/bushel, down from last year’s average of $7.09. Exceptions to the downward trend could come from oilseeds, with vegetable oils expected to fall less dramatically than grains and some even forecast to rise in the third and fourth quarters. This is because global demand for oils, particularly from emerging markets, is tipped to stay strong, and the role of vegetable oils in the biofuel sector means prices are linked to the price of oil, which is forecast to rise.
It’s not just speculators who are tipped to be less aggressive, either. Markets may be slow to react to good news, with prices taking longer than usual to fall, says Watts.
And although agricultural commodity prices are expected to be lower than in 2011, that isn’t to say they will be ‘low’. Most commodities are forecast to remain at historically high prices despite the falls anticipated for 2012. There won’t be a collapse to 2008/09 levels, Rabobank says, as “elevated prices must persist to encourage farmers to continue expanding production to keep pace with demand growth and allow global inventories to rebuild.”
And although harvests for many commodities are expected to be large this year, other risks remain. There are the politicians, for example. Memories of the Russian export ban in 2010, which sent shockwaves through the grains markets, are still vivid. “2012 will once again see political intervention as an important determiner of winners and losers in the agri-complex,” says Rabobank.
In 2012, a record share of global grain exports will come from the Black Sea and South America, potentially overtaking the share of the US and the EU, the bank says, warning “this creates higher political risk and volatility in markets as they grapple with the feast-or-famine nature of exports from these rapidly developing nations.”
Finally there’s the weather. Forecasts for 2012 are posited on the assumption there won’t be unfavourable global weather patterns for a third season in a row. If these hopes turn out to be in vain, expect most bets on lower prices to be off.
Ten to watch
Palm oil: Oilseeds are likely to go up in price this year, particularly palm oil. There is more demand from biofuel and emerging markets, while production growth has slowed.
Soybean: Also tipped for high prices. Land has been lost to maize, and drought in South America has put the market on edge. A return to normal weather soon will be key to avoid price hikes.
Rapeseed: Supply and demand will be tightly balanced. Ukrainian production is thought to be down as much as 20%, and European yields may have suffered from a mild winter.
Orange juice: Prices soared after fungicide residue was found in Brazilian imports. With tests still ongoing and some concerns over frost damage to US crops, prices will be high for now.
Barley: Supplies are tight - barley has lost area to other crops, there have been growing issues, and global demand for beer is up. A strong planting response this spring will be key.
Oats: Demand for oats has doubled over the past 10 years, but production has failed to keep pace. This has sent up prices, with oats trading at a premium to feed wheat recently.
Cotton: One commodity tipped to be vulnerable to the gloomy economic outlook in many Western economies, cotton is forecast to become considerably cheaper in 2012.
Maize: Prices have come down but could rise in early 2012 as the impact of the South American drought is yet to become clear. A good US crop, however, should see prices fall again.
Sugar: Prices are expected to be lower but volatile in 2012, as sugar can be especially vulnerable to interventionist policies. The export policies of India and the EU will be key.
Cocoa: Good supply coupled with dampened demand should spell lower prices for 2012, but there is uncertainty over Ivory Coast market reform, making cocoa a candidate for volatility.