While equities have soared, commodities have struggled. It’s not just base metals, agricultural (‘soft’) commodities have been sliding too. Cotton, sugar, cocoa and Arabica coffee have fallen in price by 38%-62% over the past two years or so.
Recovery is unlikely any time soon. Producers responded to big, mid-decade price rises by boosting output and making better use of fertilisers and pesticides. The production increase in the past two years has cut prices, says Emiko Terazono in the FT, but unlike in the grain markets, where seeds are planted every year, it takes longer to reverse rising output in these markets.
“Coffee bushes will continue to produce beans, and cocoa trees keep growing once planted.” In the sugar cane market, it can take around four years to start eroding a glut. Many softs rely on small-scale farmers in developing countries who have little option but to sell even when prices are low, which reinforces price declines.
The outlook for grains isn’t too encouraging either, says Capital Economics. The US Department of Agriculture expects global wheat and soybean production to climb by 7% on last year, and corn production by 13%. That will take output to record levels, eclipsing demand. Grain prices will fall further.