All of The Things You Love At Breakfast Facing Huge Price Rises

Commodities breakfast club sees price rises
By Javier Blas
Published: October 26 2009 17:25 Last updated: October 26 2009 17:25
The food crisis has moved from lunch and dinner to breakfast.
Tea, cocoa, sugar and coffee prices have hit multi-decade highs over the last few weeks, while the cost of orange juice has also risen sharply. Among “breakfast” commodities, only milk prices remain low.
Tea is at an all-time high; cocoa has reached a 30-year high; sugar, a 28½-year high, and coffee is near a 11-year high. Orange juice has risen to its highest levels in 15 months. The sharp increases in the prices of these soft commodities contrasts with relatively depressed prices for agricultural commodities including wheat, rice, soyabean and corn.
“The price divergence is a good indicator that fundamentals are at play, rather than just speculative investments lifting the cost of all food commodities,” says Emmanuel Jayet, head of agricultural commodities research at Société Générale in Paris. Supply disruptions, rather than stronger demand for food, are driving the rally in soft commodities, analysts and traders say.
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“Soft commodities are united by the fact that their production is concentrated in developing countries,” says Nicholas Snowdon, a soft commodities analyst at Barclays Capital in London, adding that developing countries – mostly in the tropical areas of the world – are more prone to output troubles due to weather, conflicts, credit shortages or the inability of farmers to respond to rising prices.
Further, production of soft commodities is concentrated in a small group of countries, making it more likely that supply disruptions have had a larger impact on prices. Cocoa is a prime example, with the Ivory Coast and Ghana accounting for 60 per cent of the world’s output.
By contrast, Mr Snowdon adds: “Agricultural commodities’ production is concentrated in developed countries, and widely spread among the US, Canada, the European Union or Australia.” In those regions, farmers respond quickly to rising prices, expanding their acreage and using more inputs to boost yields.
Kona Haque, a commodities strategist at Macquarie in London, cites consumption as a unifying factor. “Demand for soft commodities has not been affected by the economic crisis as much as other commodities,” she says.
However, not everyone agrees that the rally has a common background. Tobin Gorey, an agricultural commodities strategist at JP Morgan in London, says the simultaneous rally is a coincidence, pointing out that tea, cocoa, sugar, coffee and orange juice have performed “differently over different times”.
Whatever the drivers behind the surge in prices, investors have been attracted by the synchronised rally, bringing speculative investors to what is usually a relatively small corner of the commodities market, traditionally handled by trading houses, brokers and merchants.
“We are seeing buying from the investor community,” says Mr Gorey.
In tea, the bull market has its root in crop damage in the main exporting countries from simultaneous droughts. Production in Kenya, Sri Lanka and India has dropped on average by 10-20 per cent this year, sending tea prices to an all-time high.
The benchmark best-quality broken pekoe, or BP1, surged to $5.02 a kilogram in mid-October, a record and up 70 per cent from January. Unlike other soft commodities, tea does not trade in a futures exchange and the business is based on physical deals, meaning that most financial investors are not profiting from the rally. The surge in cocoa prices has a main cause: the Ivory Coast, which delivers 40 per cent of the world’s cocoa, had a poor harvest this season and, in spite of favourable weather, traders fear that the country’s ageing trees will deliver an even smaller crop in the 2009-10 crop year that started this month.
Cocoa consumption has outpaced supply for the past three seasons and another bad crop in the Ivory Coast could prolong the deficit for a fourth consecutive year, the longest period of supply shortfalls since the shortages of between 1965 and 1969.
Last week, New York’s cocoa prices hit $3,412 a tonne, up 28 per cent this year, and their highest level since February 1980.
The sugar rally is the result of a large supply deficit due to disappointing crops in Brazil and India, the world’s top producers. In India, the world’s largest consumer of sugar, the driest monsoon since 1972 due to the El Niño weather phenomenon has damaged the cane crop. Meanwhile, El Niño has brought rains to what is normally the dry season in Brazil, which accounts for 60 per cent of the world’s sugar exports.
Raw sugar prices in New York rose to a 28½-year high above 25 cents per pound last month and since then the cost of the sweetener has hovered around 23-25 cents.
While tea, cocoa and sugar have strong fundamentals driving price rises, the supply and demand equilibrium on coffee and orange juice is somewhat more balanced. Even so, prices are on the rise.
In the case of coffee, production losses in Colombia and fears of a low crop in Brazil have supported the market. New York’s arabica coffee hit 145.40 cents a pound last week, up 30 per cent so far this year.
Orange juice had been supported by output losses in Brazil and Florida, the world’s top producers, due to cold weather and the spread of the so-called greening disease which forces farmers to uproot trees. “Once infected, there is no cure for a tree with citrus greening disease,” warns the US Department of Agriculture.
New York’s frozen concentrated orange juice futures hit a 15-month high of $1.1820 per pound last week, up 72.4 per cent since January.