A farmer cutting a cocoa pod to collect the beans inside on Friday, November 18, 2022, at a farm in Azaguie, Ivory Coast.
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Rising prices for soft commodities, from orange juice to live cattle, complicate the inflation picture.
A host of agricultural commodities have risen in recent months, driven by weather-related damage and rising climate risks around the world, leading to tighter supply. The higher prices are adding further pain to consumers’ pockets at a time when persistent core inflation, excluding food and energy, stood at 4.3% in August.
Futures contracts on orange juice, live cattle, raw sugar and cocoa each reached their highs for the year this month. They are all currently in “supply-driven bull markets,” says Paul Caruso, director of commodity investments at Ancora.
The S&P GSCI Softs Index, a sub-index of the S&P GSCI Commodities Index that measures only soft commodities, is up more than 18% so far this year.
Orange juice has soared due to a citrus shortage and last fall’s hurricanes that hit Florida, the top U.S. producer of orange juice. Major exporters including Brazil and Mexico have also reduced their estimated orange harvests for this year due to warmer temperatures. temperatures make harvesting more difficult.
The juice futures market hit a record $3.50 per pound this month. Live cattle futures also hit a record, reaching $1.9205 per pound.
Meat prices have been driven by shrinking U.S. livestock populations, continued demand for beef and higher input costs for labor and fuel. A prolonged drought in the Midwest earlier this year damaged grasslands and hay crops, forcing some farmers to cull their herds. U.S. Department of Agriculture data predicts declining supply this year and next, and possibly into 2025 and 2026, before supply rebuilds.
Not only breakfast or lunch have become more expensive, but also dessert.
Prices for raw sugar and cocoa have risen dramatically in recent months. Sugar futures reached 27.62 cents per pound last week, the highest level since 2012, while cocoa futures rose to $3,763 per tonne this month, also the highest in more than a decade.
Sugar prices rose earlier this year due to rising demand coupled with downward crop revisions from key producing countries such as India and Thailand due to extreme weather conditions. For example, India is the world’s second largest sugar producer after Brazil.
“Soft raw materials in particular are very fragile and very sensitive to weather changes,” which can disrupt production, said Darwei Kung, head of raw materials and natural resources at DWS. “That’s why we see the price going up and there’s no short-term solution because there’s only so many people that can produce. And that’s not as sensitive to the demand as it is to the production side.”
Since food and energy are not included in core inflation calculations, Kung added that consumers could face higher daily prices than central bank policymakers take into account. That could cause a “doubling” of prospects around inflation, which is more difficult for consumers, at least in the short term, he said.
Shoppers are bearing the brunt of higher prices as the world’s largest food companies try to pass on their rising input costs.
‘It is certainly not the time to talk about deflation [or] price reductions due to the significant decline we have seen in gross margin… We continue to see high levels of input cost inflation,” Nestlé chief financial officer François-Xavier Roger said at the Barclays Consumer Staples Conference earlier this month.
The Nestlé executive noted that costs for sugar, cocoa and Robusta beans for coffee have increased, adding that “obviously some other items have fallen, such as energy, such as transportation, but net-net still a few billion higher in terms of input cost inflation in the U.S. 2023.”
Unilever’s chief financial officer Grame David Pitketh similarly noted at the Barclays conference that the company – maker of Ben & Jerry’s, Magnum and Breyers ice cream – continues to see inflation in the food and ice cream categories. At the end of July, Unilever reported a 12.6% increase in “underlying prices” within the food sector and 11.5% within the ice cream sector, the latter being Unilever’s most discretionary category where “private label is attractive to consumers”, Pitkethly said.
“We have a lot of inflation and prices… the consumer is feeling those prices,” the CFO said.
To be sure, prices of other agricultural commodities, such as corn and wheat, have fallen from their peaks earlier this year, making the outlook brighter for consumers.
Benchmark soybean futures fell to a one-month low last week after the USDA reported weaker-than-expected soy export sales. Corn and wheat reached their highest levels of the year so far in January and February, and have fallen since then.
Some analysts are counting on higher interest rates and a slower economy to curb consumer appetite.
“I think volatility will continue as we understand what the crop is, but as important as the crop is, it’s all about understanding demand,” said Jeff Kilburg, founder and CEO of KKM Financial.
If demand suffers, it could even portend a decline in stock prices, Kilburg said.