Friday, March 21, 2014

Commodity prices under pressure

Commodity prices in agriculture are facing upwards pressure. It's nothing like the price spike of 2008, but the bearish mood that prevailed at the end of last year has disappeared. The structural pressures of increased demand and little effective increase in supply rate remain in place, even if the rate of growth in Chinese demand has weakened as the economy slows. Stocks are relatively plentiful, but demand from emerging markets is increasing.

In some cases, weather has been a factor. Dry weather has affected sugar production in Brazil, and there are concerns about dryness in India and Thailand, two leading producers. At the same time the sugar reform in the EU has had an effect. Sugar beet producers do not withdraw too hastily as it is a good break crop and they have sunk cost investments in the crop, but a 9 per cent fall in production is expected this year. Farmers in East Anglia have been complaining for some time about reduced margins. Cocoa prices have risen in anticipation of an El Nino effect in West Africa later this year.

Rising global demand is sustaining dairy prices, although the impending end of quotas in the EU may boost production and push them down again. Coffee has seen particularly big rises because of drought concerns in Brazil with prices of higher quality beans up by as much as 70 per cent. These may filter through to consumers by the end of the year.

Any price increase is particularly a concern in developing countries where food forms a much larger part of household budgets, but under conditions of austerity and reductions in real wages, consumers in developed countries are also very sensitive to food price inflation. In Britain, hard discounters such as Aldi and Lidl are undercutting mid-market retailers like Sainsbury's and Tesco. More up market retailers like Waitrose are less vulnerable, while good performance by the food arm of Marks & Spencer has offset disappointing returns in clothing.

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