Surging Soft Commodities: Unveiling the Fundamental Forces Behind the Rise in Coffee, Sugar, Cocoa, and Cotton Prices
The Commodity Report #143
Why Coffee, Sugar, Cocoa and Cotton Rise in Price
A short overview of why certain soft commodities are at or near new highs - the fundamental drivers:
In another recent newsletter, we already touched upon the fundamental drivers of this historic cocoa rally. (find the piece here)
As per the International Cocoa Organization, there was a deficit of 216kt in the global market during 2021/22 and 99kt in 2022/23. With a significant decline in West African output in the ongoing 2023/24 season, it is anticipated that the market will experience a substantial third deficit, nearing 400kt. This would result in stocks reaching their lowest levels in at least a decade.
Concerns are also arising regarding the potential impact on the 2024/25 season. The cocoa regulator in Ivory Coast has reportedly suspended forward sales for the 2024/25 season until there is more clarity on how the upcoming crop season might unfold, as stated by ING.
Coffee
Coffee prices are on the rise due to constrained coffee inventories and adverse weather conditions in Southeast Asia's coffee-producing areas, likely linked to El Niño. Additionally, rebel attacks on Red Sea shipping since early December have disrupted the supply chains between Vietnam, a leading robusta producer, and European and US East Coast markets, further supporting prices.
Sugar
El Niño-induced dry conditions have led to reduced sugarcane harvests in major producers such as India and Thailand. In response to this, India extended sugar export restrictions in October to ensure sufficient domestic supplies. Thailand is experiencing the lowest yield from crushed cane in at least 13 years, primarily due to drought, while Brazil, the top producer, is also grappling with drought conditions.
Cotton
In the US, the leading cotton exporter, ending stocks for 2023/24 reached a seven-year low due to consecutive years of drought affecting production. On a positive note, there is anticipation of a double-digit increase in cotton acres planted in 2024 compared to the previous year, as reported by Gro Intelligence.
Frozen OJ
Furthermore, the higher prices for Orange Juice are expected to persist. The second-largest producer, the US, has faced challenges in production due to disease, extreme weather, and a decline in the number of Florida orange farmers. Florida's orange acreage has declined by more than half since 2000.
Citadel made more than $4 Billion from Commodities
According to a recent report from Bloomberg, Citadel's commodity-trading division generated over $4 billion in profits in 2023. The notable gains were attributed to the strong performances of Citadel Energy Marketing, its merchant-trading arm, along with successful European gas and power trading. The flagship fund of Citadel experienced a 15.3% increase in value last year, leading the firm to return approximately $7 billion to its clients.
While the 2023 results were impressive, they were roughly half of the staggering $8 billion generated by Citadel's commodity trading in 2022, a year when the overall fund saw a remarkable 38% surge. It is worth noting that 2022 is likely considered an exceptional year. Citadel currently holds the top position among hedge funds in terms of cumulative profits since its inception, boasting around $74 billion in estimated net gains, as reported by LCH Investments.
Fertilizer Prices Stabilize
Fertilizer prices, although no longer at the peak levels seen in 2022, remain high when compared to historical standards. This is contributing to the sustenance of food inflation, as farmers incur increased costs to maintain the health of their crops.
Natural gas prices play a pivotal role in shaping fertilizer prices, acting as a fundamental determinant in the agricultural sector. The production of nitrogen-based fertilizers heavily relies on natural gas as a key input. Ammonia, a crucial component in nitrogen fertilizers, is synthesized through a process that involves significant natural gas consumption. Fluctuations in natural gas prices directly impact production costs, subsequently influencing fertilizer prices.
This week look out for the following:
Richmond Manufacturing Index as well as Durable Goods Orders on Tuesday
Core PCE Price Index on Thursday
ISM Manufacturing PMI on Friday
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Till next Monday, Lukas
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