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Agri commodity prices may track lower as recession fear dent demand expectations

28 Oct 2022 5:09 pm
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Mumbai, 28 OCT (Commoditiescontrol): Agri-commodities from palm oil to corn have extended their decline, paring some of the gains recorded earlier this year, as fears of recession due to interest rate hike decision by the Federal Reserve and central banks across the globe, as well as increased supplies have dented demand expectations and tamed investor appetite for food commodities alongside risky assets.

Bloomberg Agriculture Index (BCOMAG) - the barometer that track real performance of commodity prices, that has hit a correction mode in July, is poised to slide further lower in the near-term. The factors that would lead the barometer lower are: current macro-economic environment that provide little impetus for demand prospect while geo-political settings are signalling at retracement in hostility that was witnessed in the beginning of 2022.

Similar trend is observed in the broader commodity indices as well. The Bloomberg Commodity Index (BCOM) declined by 8.1% in September and remains up 13.6% year-to-date. The Bloomberg Commodity Spot Index, which tracks futures contracts for everything from oil to copper and wheat, fell 1.6% to settle at its lowest level since January 24. The measure has lost almost 22% since peaking in June and has erased all of its gains since Russia’s invasion of Ukraine.

Constant Maturity Commodity Index (CMCI) and other commodity index strategies slumped during September. CMCI declined by 5.5% in September but remains up 8.4% year-to-date.

Agriculture fell 1.6% in September, led by a 23% decline in cotton prices, which was offset by a 9% jump in wheat prices.

The continued aggressive tightening of the U.S. Federal Reserve (FED) and the resulting U.S. dollar strength weighed on investors' sentiments. As signs of a global economic slowdown became increasingly clear, investors downgraded demand expectations for most commodities.

While global inventories for many raw materials remain tight in the face of robust demand, there is increasing concern of a pullback. Unprecedented interest-rate hikes by central banks to stem the highest inflation in decades is stoking worries that the tightening measures will throw economies around the world into recession. A slowdown would hurt the outlook for energy demand and sap investor appetite for risk.

While energy sector led the overall decline in commodities basket, among agriculture commodities - Wheat set to lead the complex lower, this time around. The commodity recently fell to a four-week low and could be a precursor for other agri-commodities such as corn, soybean, and sugar etc to follow the suit. Cotton prices have fallen 30% so far this year, as rapid interest hikes from major central banks and Covid-19 induced lockdown in China - world's largest cotton importer, dampened economic outlook and, ultimately, have caused a demand destruction.

Currency cues too turned negative for commodities. U.S. dollar - the world commodity currency, strengthening against major currency is a decisive element. It’s relentless surge to repeated records is making commodities priced in other currency more expensive for overseas buyers. It has become a major factor of the erosion in demand outlook.

Further, denting the price prospect is, U.N.-brokered talks to keep a channel for Black Sea grain exports from Ukraine open. It may be recalled that Russia-Ukraine war had pushed commodities complex hit multi-year highs back in June. The war in Ukraine has also impacted supply chains, and with inventories of raw materials and agricultural commodities tightening in the face of robust demand, commodity prices across the board soared into the skies.

Interestingly, China’s yuan has slumped to levels approaching 14-year lows. Given, the country's immense demand for commodities and resultant impact on balance of trade. As a result, the weakening yuan, therefore, will depress demand from Chinese importers and add to the bearish sentiment for commodities at present.

Prices of grains scaled higher, surprising enough for analysts to believe, them as a pretty unusual trend. That's because the prices rose during harvest time. That was partly caused by Russia invading Ukraine and Covid-19 pandemic forcing lockdown across the globe. The dual impact drained availability and free movement across major channel, particularly Black Sea in case of grains, other agri commodities. After experiencing turmoil over the last six-months, it appears the run-up so far in prices is tapering off and could start retracing lower. Analysts are of the view the fall will be triggered by factors that were at the forefront of upscaling the prices.

Considering the uncertainty in the volatility, the macroeconomics, all the geopolitics, the inflation and interest rates, they together should cause demand to slowdown. Agriculture commodity prices will start trending lower faster.

It may be remembered, the key issue that led the rise in Bloomberg Agriculture Index during June - the supply-chain bottlenecks due to Russia-Ukraine war, are getting address. This is effectively relieving consuming nations of demand push inflation pressure. Meanwhile, subsiding of geo-political tension, particularly in the wake of United Nation brokered resolution of Black Sea corridor has brought relief to prices of grains and crude oil.

Falling energy prices, a surging U.S. dollar, ongoing drought throughout much of the U.S., continuing tensions in the Black Sea region and weakening global economic outlook have all created volatility in grain prices, analyst with a global brokerage firm mentioned in a note.

Resilient US economy continue to test nerves of Federal Reserve. Because consumer spending remains strong despite inflation in world's top economy. However, other leading economies are struggling to cope with inflationary pressure. As major central bank spring into action to tame inflation, some moderation in prices are expected. Slew of data from USDA certainly underscores the fact that demand is weak.

However, movement in U.S. dollar will be the major factor that holds key about future price move. There is enough steam left in Greenback or dollar to strengthen further. It is still to scale new peak before seeing a pullback. Till then, agri-commodities may trend lower.

(By Commoditiescontrol Bureau: +91-22-40015505)

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