Riding the Roller Coaster: Kona Haque on The Future of Agri and Edible Oil Industries in 2023

Navigating the Post-Covid Agri-Commodity Market: What's Driving the Volatility?

The worldwide agricultural and edible oil business is renowned for its dynamism. Could you elaborate on the most significant market trends you've noticed?

The entire agricultural and food commodity market has been on a roller coaster ride since Covid began in 2020. Prices had already been edging higher as the low farmgate prices during the mid-2010s, along with the US/China trade war, had led to farmer underinvestment in acreage and yields. This already-smaller supply base was compounded by inclement weather in the likes of Latin America and other key agri-origins.

When economies re-opened from COVID lockdown, the imbalance of a tighter supply and strong pent-up demand post-Covid caused prices to rise. Supply-chain constraints, lack of labour and soaring freight rates all led to higher food prices. Throughout this, agricultural markets managed to muddle their way through, by drawing down inventory where possible.

But nothing could have prepared markets for the subsequent Russia-Ukraine war. With stocks already tight due to the previous events, heightened geopolitical risks in one of the most important regions in the world in terms of agri and edible oil exports led to a severe supply shock. The Black Sea being a key exporter of grains and oilseeds, the diversion of shipments via inland routes pushed prices substantially higher. Thankfully, the UN/Turkey-brokered grains corridor allowed shipments to resume, while greater plantings (in response to the price rally) have allowed for a more comfortable S&D lately.

Although prices have more recently fallen under harvest pressure, supply-side risks remain real. With the very strong El Nino currently in place causing potential weather risks, global net food importing nations are all suffering. The rice ban in certain exporting countries has the risk of raising substitute demand in the grains complex. Stocks of agri commodities globally are still not at pre-Covid levels, meaning there is little room across the markets for additional supply setbacks.

Regional Resilience: How Diverse Origins Are Stabilizing Global Agri-Commodity Supplies

Given the global nature of the agricultural and edible oil industries, are there any specific regions that have stood out in terms of market performance or shifts over the last few months? What do you think is driving these regional trends?

Global markets have generally been quite resilient throughout the above roller coaster ride, with tradehouses fulfilling an important role in ensuring grains/oils/softs are shipped in the necessary volumes to the required destinations, regardless of the huge origin dislocation we have witnessed. A saving grace has been the growing emergence of the southern hemisphere as a powerful counterforce to Russia and Ukraine as a key grains/oilseeds origin. If it wasn’t for Brazil - and to a lesser extent Argentina and Australia – then global supplies would have been considerably tighter today. This diversity of origins has helped offset supply-shocks out of the Black Sea. The strong US dollar, combined with tensions between China and USA, has further amplified the importance of Brazil as a key origin, which has resulted in the USA becoming a less dominant agricultural exporter. India too has emerged as a surprisingly robust exporter of wheat and sugar, thanks to favourable farmer incentives, good back-to-back monsoons (up until this year, that is) and favourable fertiliser prices from Russia.

The Demand-Supply Equation: Recent Fluctuations in Coffee, Sugar, Pulses, and Grains

Given your knowledge of commodities such as coffee, sugar, pulses, and grains, have there been any noticeable patterns or fluctuations in demand and supply for these commodities in the last month? What effect do these patterns have on global market prices?
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Global supply/demand balances for sugar and coffee have been arguably even tighter than for grains and oilseeds. As a result, the latter two have rallied in 2022/23 even as grains moved sideways. The El Nino weather phenomenon has negatively impacted the supply-side of sugar, with India and Thailand, both key sugar cane producing regions, seeing smaller crops this year. Cocoa, rubber and robusta coffee have also been affected by El Nino weather, disrupting production yields. Given that these markets have longer supply lags (ratoon cane or tree plantations take time to recover, unlike grains, which can be planted annually), their cycles tend to be longer than grains. As such, I expect the deficits in these markets to be longer. On the demand side, meanwhile, despite these “soft commodities” not being strictly staple commodities like grains or oils, I have noticed fairly resilient consumption patterns in the face of rising prices. Indeed, if anything, demand is still playing catch up in these markets as consumers go out to restaurants and bars post Covid to consume coffee and sugar foods. Even with slowing economic growth, I believe that most consumers today see these commodities as small luxuries that they are happy to pay for despite broader inflationary concerns.

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Future Outlook: What to Watch in the Agri and Edible Oil Industries for 2023

What are your projections for the agri and edible oil industries for the rest of 2023 based on current market trends? Are there any commodities or regions that stakeholders should pay special attention to?

The global agri and edible oil industries have shown remarkable resilience in the past years, despite high price volatility. Although prices have eased up since peaking in mid-2022 after the Ukrainian invasion, we are not yet out of the woods in terms of supply-side risks. El Nino still has the potential to wreak havoc around the world. As mentioned, demand has been very resilient and income inelastic, despite inflation and economic concerns around the world. In this environment, it could take very little to see panic buying by governments as they react to perceived tightness or even impose export bans, to tighten markets further. Stocks globally as a proportion of consumption are still not as comfortable as they were pre-2018. Longer term, I am concerned that climate change has the potential to cause more extreme droughts or floods at key producing origins, which could negatively impact yields. Indeed, India next crop year may find itself suddenly shift from being a net exporter to net importer of many key commodities. Agile trading, adequate hedging by producers and consumers and good insight into market moves will be key!

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