Commodity prices will spike higher over next two years

Global agricultural commodity prices are booming. Prices, as indicated by the Economist Intelligence Unit’s Food, Feedstuffs and Beverages (FFB) index, are on course to rise by 16% this year—repeating the strong performance of 2006. Surging demand for food, feed and fuels are combining with low stock levels to create extremely tight markets.

Unfavourable weather conditions, combined with competition for acreage, imply that it will take some time still, before supply manages to catch up with demand. The FFB index will thus rise by a further 2% a year in 2008-09, suggesting the commodity-wide price boom is far from over.
Grains and oilseeds will lead the surge, with annual average price increases of 16% and 29%, respectively, expected this year. Our latest market assessments point to both markets remaining in deficit until at least 2009, implying further upward price pressure. Prices for both markets are set to rise by 5% in 2008.

According to Kona Haque, Senior Commodities Editor, “The ethanol and biodiesel industries are pushing up demand for crops such as maize, soybeans and palm oil, but lack of available land and adverse weather conditions are preventing output from rising sufficiently.” As a consequence, stocks will be drawn down further and the inevitable rise in price will have knock-on effects on substitute crops and end-use sectors such as livestock and dairy. In 2009 oilseed prices will rise by a further 2% amidst further supply pressures, as planted area switches to grains in China, to sugarcane in Brazil and to maize in the US. Grain prices will also rise in 2009, by 4%, amid continued shortages.

The beverages price index will rise by 10% this year, but fall by almost as much in 2008. Uncertainty over Brazil’s coffee crop prospects, prompting speculative buying and hoarding by farmers, and a poor cocoa crop (coupled with political instability in Côte d’Ivoire), have collectively raised prices. But producers are now responding to the attractive prices (now in their fifth year of consecutive increase) and by 2008 production of both markets, together with tea, will overtake consumption. The resulting growing surplus will see prices ease over 2008-09.

Sugar is the only price index forecast to fall in 2007. Having peaked early last year, prices will tumble by a third from their overvalued highs of 2006. This follows a surge in sugar output in key producing areas, which has resulted in oversupply. However, the decline will be short-lived. Prices will bottom out in 2008 and rise by 7% in 2009 as increased demand for sugar as a biofuel feedstock supports the market, while supplies from EU—once a major sugar exporter—decline following the reduction of subsidies.

For specific commodities, the Economist Intelligence Unit’s current forecasts are as follows:

Overview: The fundamentals for grains and oilseeds have become increasingly bullish, and prices will rise higher and for longer than previously expected as stocks remain low. By contrast, the beverages and sugar markets look weak, with supply starting to run ahead of demand.

Cocoa: In the light of the smaller than expected deficit in 2006/07 and the bigger surpluses now projected for 2007/08 and 2008/09, the outlook is for cocoa prices to plateau over the longer term, although they will remain well supported.

Coffee: Prices will be sustained into 2008, with the usual fourth-quarter bounce when northern hemisphere demand reaches a seasonal peak. Downward price pressures are likely to emerge in early 2009.
Grains: Prices will stay higher for longer as demand continues to run ahead of supply.

High wheat prices are starting to affect consumption, but could stimulate increased production. A huge US maize crop will temporarily relieve the acute shortage, but stocks will fall again in 2008/09. Demand for rice is slowly rising, putting upward pressure on prices, but exportable supplies will remain adequate in 2008. Exporting the county’s production of sorghum will be enough to meet the limited import demand.

Oilseeds: The oils and oilseeds markets are entering a period of high (but volatile) prices that will last the entire forecast period as demand runs ahead of supply. Despite an increase in soybean supplies from South America, the market is anticipating a further reduction in global stocks. Prices of the main vegetable oils are all trading at record levels, despite slowing growth in biodiesel consumption. Thanks to low stocks, palm oil prices are especially buoyant. Oilseed prices could be driven even higher if a prospective increase in South America’s 2007/08 crop area fails to materialise.

Sugar: Prices have fallen, reflecting higher than expected production and stocks, but growing demand for ethanol will support the market from 2008.

Tea: Assuming normal weather, chronic global oversupply will continue to depress international tea prices over the next two years.