Recovery ahead in agricultural commodity prices

by: Casper Burgering

In this Agri Commodity Insights: Wheat and cocoa prices are still above their 1 January level. Price pressure on corn, soybean, sugar and coffee set to decrease in the fourth quarter. US economic policy playing a major role in the grain price trend. Low US soybean prices are an incentive for European importers. Brazilian real’s recovery against USD is boosting coffee and sugar prices.

Agri-Commodities-Insights_October-2018.pdf (196 KB)

Grains: Trade war causes turmoil in soybean market Soybean

The supply side in the soybean market is dominated by two superpowers: the US, which accounts for around 35% of global production, and Brazil, with a 30% share. Both countries are reliant on exports. The picture on the demand side is different, with only one dominant country, China. The latter is the world’s largest consumer of soybeans, with a share of around 29%, followed by the US with a share of around 19%. China is largely dependent on imports of soybeans and accounts for two thirds of global soybean imports. In the past, by far the largest share of total Chinese soybean imports originated from the US, but that has now come to an end. The global soybean trade flows have been changed considerably by the trade war between the US and China. In retaliation for the trade barriers erected by the US, China imposed an import tariff of 25% on soybeans from the US in early July. The effects of this tariff are gradually becoming visible in the trade figures and influencing the price trend. China is now importing more soybeans from Brazil, but soybeans from Argentina are also becoming more popular among Chinese importers. Meanwhile US exporters are finding it more difficult to sell this year’s harvest due to the changing demand pattern, particularly given the now limited opportunities for selling to China. They have therefore turned their attention to Europe, where prices were already under pressure as a result of the impending trade war. But now that the US is clearly heading for a record harvest this season, the downward pressure on prices will increase further. Indeed, the spot price has fallen 6% since July. For the rest of this year, the additional demand from China will keep Brazilian prices high, while the record US harvest will depress prices. The relatively low US prices – also compared to soybean prices in Brazil – will incentivise European importers to buy more soybeans from the US. But Europe cannot match the level that China originally imported from the US. The long-term outlook for soybean demand remains good, particularly from the animal feed industry. This is mainly due to the further increase expected in livestock worldwide.


Although the corn market is also influenced by US trade policy, it is more sensitive to NAFTA developments, particularly those involving Mexico. Mexico is the largest buyer of US corn. In late August, the two countries signed a bilateral agreement to keep agricultural products free of import duties. While prices subsequently rose, the increase turned out to be short-lived and corn prices are currently under pressure again because the harvest in the US, the world’s largest producer of corn, has so far been very positive. By the end of September, the amounts harvested had already reached 16% of the total forecast for the season, which is a much higher rate than in previous years. That means availability remains good. We expect this year’s abundant supply in the US to dictate the price trend. The good news is that the forecast demand for corn remain robust. In the US, for example, ethanol exports, which account for about 30% of total corn consumption in the US, increased by 33% year-on-year in the first half of 2018. However, the abundant supply will impact on prices during the rest of this year and keep them relatively low. The only way that the tide will turn in this scenario is if US rainfall is heavier than average.


Wheat prices increased in the first half of this year because more producers became sceptical about the quantities likely to be harvested. The main reasons for this increased pessimism were the warm weather and relatively low rainfall in Europe. The US Department of Agriculture expects the global supply of wheat to fall by nearly 2% this season, while demand remains constant. For Europe, including Russia and Ukraine, which had to overcome warm and very dry summer weather, output is expected to be much lower this season than last season. The wheat market is being influenced not only by the trade dispute, but also by US monetary policy. The package of retaliatory measures imposed by China included the imposition of a 25% import tariff on US wheat. Global trade flows are consequently going to change. China is expected to appeal to Russia for wheat. Wheat prices have fallen since early August owing to the US monetary stimulation policy being wound down, with higher interest rates and a stronger dollar as a result. If the downward trend in prices continues, farmers may opt to reduce their wheat acreage further and plant different crops. ABN AMRO Group Economics expects the dollar to close 2018 at EUR/USD 1.15, which means a somewhat stronger dollar towards the end of the year compared to the current level (1 October: EUR/USD 1.158). This, along with the contraction in global wheat output, means that wheat prices should rise again during the fourth quarter, provided global demand for wheat remains robust.

Tropicals: Brazilian real gives direction to coffee and sugar prices


Brazil is the world’s largest producer of coffee, with a share of approximately 35% of total production. Volatility in the Brazilian real therefore directly impacts on coffee prices. The real has lost about 20% so far this year (as at 1 October) against the US dollar, while coffee prices have fallen by 17%. A declining real encourages Brazilian farmers and exporters to sell more coffee on international markets in order to maintain their returns in local currency. In addition, this year’s harvest was good, and that, too, puts downward pressure on prices, assuming the same level of demand. But the political situation in Brazil has also caused coffee prices to fall in value. The country’s forthcoming elections are increasing the uncertainty about future government policy, which is making both investors and consumers more nervous. This uncertainty means coffee prices are going to be very volatile over the coming period. As a result, the number of short positions has increased over the past few weeks, and investors are expecting lower prices in the short term. Once the elections are over and the country’s political direction becomes clearer, we anticipate a recovery of the real. This will then push coffee prices up again.


The Brazilian real has also left its mark on sugar prices. Like coffee, sugar is traded in US dollars on international markets. And since Brazil is also the world’s largest producer of sugar – with a share of 21% – the real has a strong influence on price dynamics. Indeed, sugar prices have already fallen by 27% this year. The second-largest producer of sugar in the world is India, with a share of 17%. The Indian government recently approved a package of support measures for the sector, partly because the low prices are causing problems for farmers and the sugar industry alike. These measures entail providing support for farmers’ production processes, subsidising transport costs and introducing export subsidies to boost the Indian sugar industry. As a result, the supply of sugar on international markets will continue rising over the coming period, and this will further increase price pressure. We envisage a stable price trend for the rest of this year as while the recovery of the Brazilian real will have an upward effect on sugar prices, the increase in supply on the international markets will limit the extent of any price increases.


Cocoa prices have risen by 8% this year, with most of this increase being in the first four months of the year and attributable to bad weather in Ivory Coast and Ghana. Together, these countries account for around 60% of the global supply of cocoa, with Ivory Coast alone accounting for 42%. Earlier this year, the prospect of a lower cocoa supply made many investors nervous, and prices increased sharply. While prices subsequently stabilised in May, they then entered a downward trend. At that stage, supply was sufficient to meet demand. Developments in cocoa grindings are a good indication of trends in demand. The fact that these grindings have continued to increase this season indicates that demand for cocoa is currently robust. As there is currently a net surplus of cocoa in the market, there will be some price pressure in the remainder of 2018. But because the surplus is relatively low, the downward effect on prices will remain limited. In the long term, however, cocoa supply could potentially increase more strongly. Ghana’s Ministry of Agriculture expects production to exceed one million tons next season, which represents an increase of 11% on the 900,000 tons produced this season and is mainly the result of improved agricultural techniques and artificial pollination. On the other hand, there is a good chance that El Niño will affect the next season’s harvest. If this scenario materialises, it will be at the expense of cocoa supplies, and prices will rise accordingly. This effect will be reinforced by the current generation of cocoa trees increasingly bearing fewer cocoa beans. It takes a long time to replace old trees, and that has an adverse impact on total supply.