Inflation fears: Corn, cotton, soybean prices surge as commodities continue relentless rise

A combination of diverse factors-new Covid epicentres, labour shortages, supply chain disruptions, political instabilities, natural calamities, energy crisis, etc is leading to the current price spikes across several agricultural commodities, says a new report.

The report by Drip Capital analyses the current price spikes across several agricultural commodities and tries to understand the impact of Covid-19 on each commodity market. It also draws attention to the current price spikes across several agro commodities while understanding how Covid-19 affected each commodity market.

Constantly rising demand not being met by equivalent supplies is one of the primary reasons for prices spiraling upwards. Beyond high demand, rising costs of common expenses like sea freight and energy, labour and raw material shortages, are responsible for the price rallies seen in staple agricultural commodities like soybean, corn, cotton, sugar, coffee, wheat, and palm oil.

On October 25, 2021, the Bloomberg Commodity Index (BCOM), a financial benchmark designed to provide diversified exposure to physical commodities via futures contracts, peaked at $105.8, a six-year high. On the contrary, throughout 2019, before the coronavirus shook the world, the index averaged just close to $80. Interestingly, the World Bank too significantly increased its price forecasts for many agricultural commodities in their October 2021 release compared to the October 2020 release. Market sentiments during the depths of the pandemic were starkly different from what they are in 2021.

Covid-19 also led to major structural changes in buying patterns. Pushkar Mukewar, co-founder, CEO, Drip Capital, in a statement said, “Over the past 1.5 years, buyers were less inclined to enter long-term purchase contracts. Due to the pandemic-induced uncertainty and unevenness, they preferred buying at the rates offered in the spot market — a reason why the market is in backwardation. Sometimes, even suppliers were compelled to back out of their contracts when spot prices were much above contract prices. This unpredictability, along with constantly rising demand and speculations around the supply of primary goods, is the triad responsible for the volatile prices seen across staple agro commodities like soybean, corn, cotton, sugar, etc.”

Overall, in the past year, Covid-19 and the resulting shipping crisis brought about a massive challenge for small and medium-sized enterprises (MSMEs), who were trying to stay afloat and continue business as usual. “Processors who were buying a commodity, processing it, and then selling it struggled because they were impacted by prices across all markets – the buying and selling side. But larger companies that possessed infrastructure, from plantations, processing plants to warehouses, etc., could procure for the entire year, store the crops during the downtime and utilize the stocks when demand increased. The larger hold a business had on the entire supply chain, the easier it was to survive covid-19 and unfortunately, MSMEs were stretched to their fullest capacities,” he added in the statement.

Drip Capital’s research further stated that some agro commodities exhibited significant volatility over the last two years. Since December 2019, corn futures, which are traded on the Chicago Board of Trade (CBOT), are up by over 50% -$5.7 per bushel. From now on, rising crude oil prices are one determinant that could reverse the downward pressure on corn prices towards the usual $4/bushel average.

Even cotton prices are on a high. Cotton futures on the Intercontinental Exchange (ICE) have been up almost 80% since December 2019. They are trading around the $1.2 a pound handle after ten years, primarily due to tight supplies. In India, the attack of pink bollworm pests has raised concerns over reduced supplies, prompting the Cotton Association of India (CAI) to predict a 38% drop in exports in the 2021-2022 season. While its reserves will mainly determine the commodity’s prices in 2022, the level of apparel demand from Europe will also be an essential factor.

Soybean futures traded on the CBOT are up almost 40%, compared to the $9/bushel average during H1 2020. In May 2021, soybean prices went up to $16.2/bushel after eight years. However, the current market sentiment seems to be that prices will revert to the average of $10/bushel, usually seen by the end of the year. On the other hand, sugar futures on the ICE have risen over 50% since December 2019. They are trading around 20 cents per lb, close to levels not seen since early 2017. Globally, stakeholders in this industry are expecting lower supplies owing to poor weather conditions.

Agriculture commodity prices across many markets had rallied in the first half of 2021, and some are still rising. But, as supply catches up, stocks are replenished and socio-economic conditions stabilize, speculative behavior will start normalizing, the report states.


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