Prices of tropical commodities under pressure

by: Nadia Menkveld

Coffee, cocoa and sugar are commodities whose prices are under downward pressure. Coffee and sugar prices are affected by the political agendas of both exporters and importers. Extra pressure has been put on these prices by the depreciation of the Brazilian real. Other factors exerting downward pressure on the price of sugar are China’s decision to increase import duties on sugar and the abolition of sugar production quotas in the EU.

Cocoa prices depressed by global surplus

The International Cocoa Organisation (ICCO) has once again upped its forecast of a global cocoa surplus this year. Its latest estimate of the surplus has been revised upwards by 120,000 tonnes. This revision has been prompted by the high level of stocks and a relatively good mid-crop in Ghana and Ivory Coast. This is putting further pressure on prices, which have already fallen by 6% since the start of this year. However, various factors may counter this downward pressure. First of all, the price has already dropped sharply from over USD 3,000 per metric ton in mid-2016 to under USD 2,000 per metric ton this June. The cocoa surplus has thus to some extent already been factored into the price. Some other events of varying degrees of magnitude may also exert upward pressure on prices. One of them is the news that a number of important producers in Ivory Coast have already sold a larger than expected part of their future harvest. Another is the recurrence of swollen shoot disease in Ghana. This virus, which is transmitted from plant to plant by mealybugs, can harm the harvest. According to the latest reports, 17% of the plants are already infected by this virus.  Further, the mid-crop in both Ivory Coast and Ghana has incurred some heavy rainfall in the past weeks and this may hinder some production forecasts and add support to the market. The lower prices of 2017 have certainly prompted a resurgence in bean processing (Grindings) the effect on trimming the surplus still to be seen. However, although there are definitely some uncertain factors that may push prices up, the risks are as yet on balance insufficiently clear to warrant upward adjustment of our forecast.  For now the outlook of the mid-crop will be closely scrutinized.

 

Owing to a shortage of sugar, the price of this commodity remained high for a long time in the past two years, but fell sharply after peaking in the autumn of 2016. This year alone, sugar has already lost a quarter of its price. A drought in India caused a decrease in production, which resulted in a sugar shortage and hence higher prices. But a spell of good weather means that the outlook for the new season looks a lot better. Above all, favourable monsoon conditions mean that production in India will be able to recover. The meteorologists are expecting a fair quantity of rain – slightly under the long-term average.

But Europe too is expecting higher volumes. After eleven years, the European Union will abolish sugar production quotas this year, thereby enabling farmers to raise their output. In the Netherlands, farmers have reacted by expanding the area under sugar beet by 10%, in replacement of wheat. The percentage is higher for the EU as a whole. This means that, once the domestic market is saturated, the sugar is exported. As a result, farmers from the EU may potentially have to compete with farmers from Ukraine. This country has managed to become a major sugar producer in a short space of time, partly due to the UAH’s low exchange rate. The entry of both the EU and Ukraine to the world sugar market is creating extra competition and putting pressure on prices.

The EU is not the only region in which politics play a role in sugar production. On the other side of the North Atlantic, sugar production negotiations are taking place between the US and Mexico. These negotiations are seen as a forerunner of – but also as an obstacle to – the negotiations on the North American Free Trade Agreement (NAFTA), which have been reopened under President Trump. The Americans complain that subsidised sugar is being dumped cheaply in the United States. But large corporations that are dependent on sugar imports from Mexico fear that this will make the commodity more expensive because the North American farmers’ production is not sufficient to meet the total demand of the food industry. They therefore do not agree with the provisional draft agreements that have been drawn up between the two countries. In China too, politics plays a role in the sugar market: the world’s second largest sugar importer has decided to drastically increase import duties on sugar. In this way China hopes to protect its own sugar producers from cheap imports from abroad. As far as sugar consumption is concerned, expectations are stable; although consumption may fall back slightly in the EU, it will probably rise in nearly all other countries. If the current weather forecasts prove correct, the harvest will recover and outpace stable consumption. Given the expected global sugar glut, pressure on sugar prices looks set to continue for the time being.

The price of coffee has fallen by 8% this year. In recent weeks, the Brazilian real has played an important role in the decline of the coffee price. The weaker currency has meant that the value of coffee in dollars has fallen. The Brazilian currency is being affected by a large bribery scandal, which now seems to be directly enveloping President Temer as well. ABN AMRO expects the real to remain under pressure in the period ahead. As a result of the Lava Jato (car wash) scandal, the situation in Brazil remains turbulent. Indeed, it is still less than a year since the previous president (Rousseff) was removed from office. This makes it difficult for Brazil to take steps to reform the economy. Reform is necessary because the public sector deficit rose to 9% of GDP in 2016 and gross debt climbed to 70% of GDP. As the reform process now appears to have been interrupted by the corruption scandal, this may have consequences for the country’s economic growth and stability. Although ABN AMRO still expects the Brazilian economy to grow by 1%, the potential obstacles to growth have increased. The Brazilian currency will therefore remain under pressure.

In the case of coffee, this translates into pressure on prices. An additional factor is that Brazil’s expectations of a bumper harvest in 2018 have already been factored into the price by the market. And although we are in an off-season this year (as the plants have to recover after a good harvest and yield fewer coffee beans), the harvest still seems to have been good. But demand for coffee is also increasing and could exceed coffee production.