(The author is a stock analyst at HOLD Fund Management)
Two agricultural raw materials go spectacularly against the current global trend in crop prices.
Agricultural commodity prices are well past their 2022 peak. One of the explanations for this can be found in falling gas prices, considering that one of the biggest cost items for farmers is fertilizer, the production of which requires a lot of energy (gas). Among the agricultural raw materials, corn is one of the most fertilizer-intensive, so it is no wonder that corn prices decreased the most: more than 30 percent in dollar terms, but wheat and soybeans also fell by 27 and 12 percent.
The dollar exchange rate is also of decisive importance in the development of raw material prices. A strong dollar encourages non-American farmers to increase production because their income in local currency will increase. Increasing production, on the other hand, reduces crop prices, so it can be stated that world market raw material prices are inversely correlated with the US dollar.
The figure shows that when the dollar is in a weakening trend, the prices of agricultural raw materials turn into a strengthening trend: based on the values, a negative correlation coefficient of approximately 0.4 can be calculated for the entire period.
There is no rule without exceptions: the price of sugar rallied 36 percent this year alone, disregarding the headwind caused by lower fertilizer prices and a strong dollar. The weather in the world’s main sugar-producing countries (India, Thailand) was unfavorable, so everyone expected Brazilian exports. The Latin American country, on the other hand, is struggling with logistical problems, the handover of a huge new sugar loading terminal has been delayed until 2025, and the loading times of ships have been delayed due to local stormy weather.
The same exception is the futures price of orange juice, which is at the highest price since its trading (that is, 1967!). The price increase here is also due to the decrease in supply, which is caused by unfavorable weather in America, Brazil and Mexico, as well as an aggressive bacterial disease – yellow dragon disease – which severely decimates the crop.
Such a significant price increase probably burned a couple of shorts, who opened sell positions in these instruments without a stop.
In futures markets, a product can have several exchange rates – depending on the date on which the product is to be delivered. The fact that the future price of a product is higher than the spot (i.e. current) price is called contango. The opposite of this is backwardation, when the futures price is lower than the spot price, in which case investors expect that the price of the product will fall in the future – this usually happens in the event of market turbulence and anomalies.
The figure below shows that the spot price of orange juice is close to $420, while the price of orange juice concentrate “two years from now” is already close to $300.
One of the classic cases of market dynamics is that where speculation rears its head, volatility soon appears with great force. However, a better-than-expected crop data could bring about a sharp correction in the prices of the two mentioned agricultural raw materials. Let’s just wait and see…
Additional articles by the author can be read on HOLDBLOG.
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