The global commodity market – from coffee to corn to crude – is heating up again. This could be bad news for policy makers and consumers in the fight against inflation.
Coffee has jumped around 13% in the past week, hitting a nearly three-month high of $2.40 a pound on the US ICE Futures Exchange. Since the beginning of the year, the agricultural product is up 6%.
Investors fear drought conditions in Brazil will reduce coffee yields and impact international supplies. In Minas Gerais, which produces nearly a third of the country’s Arabica crop, there was no rain last week. Weather experts warn that below-average rainfall could persist for the rest of 2022.
Other key coffee growing markets have struggled to offset the potential decline in Brazil. Coffee exports from Vietnam, for example, fell by 17.1%, to 113,852 tonnes, while Colombian production fell by 22%, to 944,000 bags.
Shortage fears have driven corn prices up nearly 7% over the past week, taking their year-to-date rally to more than 10%.
Climate challenges in the northern hemisphere weighed on the commodity market, especially corn. Severe droughts in the United States, Europe and China are adding to price pressures.
According to the United States Department of Agriculture (USDA), 55% of the national corn crop was rated in good to excellent condition (pdf). This is a decrease of 5% compared to the same period a year ago.
Heat and drought could lower yields of many crops, such as soybeans and wheat, in the USDA’s upcoming agriculture update, says Phil Flynn, author of The Energy Report.
“It comes at a time when the world was looking to the American farmer to provide a buffer to offset the risk of losing supplies to war-torn Russia and Ukraine,” he wrote. .
Overall, investment funds that focus on agriculture have seen notable increases. Over the past month, for example, the Invesco DB Agriculture fund, which maintains exposure to coffee, corn, soy and sugar futures, has gained more than 5%.
Could US crude still hit $100?
West Texas Intermediate (WTI) crude oil prices jumped nearly 5% last week, topping $94 a barrel on the New York Mercantile Exchange (NYMEX). Brent, the international benchmark for oil prices, rose above $100 on the ICE Futures Exchange in London.
Despite global demand concerns that wiped out post-invasion oil gains, supply concerns revived crude prices.
Abdulaziz bin Salman al Saud, the Saudi energy minister, hinted that OPEC+ could cut production to support prices as the paper and physical oil markets had become “disconnected” and “schizophrenic”. OPEC President Bruno Jean-Richard Itoua backed the potential cut, telling the Wall Street Journal the alliance could choose to pump less.
Market analysts had expected OPEC to consider the move following its 2023 outlook which predicts slowing demand amid a slowing global economy.
But any decision by OPEC to cut production could depend on the geopolitical situation and a nuclear deal between Iran and the West. If a new nuclear deal is resurrected, Tehran will pump into global energy markets around 1.1 million barrels a day.
Meanwhile, the Energy Information Administration (EIA) reported its second consecutive week of supply cuts in the United States. In the week ended Aug. 19, national crude inventories fell 3.282 million barrels, higher than the market estimate of a decline of 933,000 barrels.
Gasoline inventories fell 27,000 barrels, while production fell 536,000 barrels. Demand fell to 8.434 million barrels from 9.348 million barrels the previous week.
Natural gas prices touched $10 per million British thermal units (Btu) in intraday trading this week for the first time in 14 years. So-called bridge fuel is now firmly above $9 on the NYMEX as investors take profits.
U.S. supplies have held steady this summer, climbing another 60 billion cubic feet last week, according to the EIA’s weekly storage report. However, the EIA Data also confirmed that the national production of electricity from natural gas had reached a record level in mid-July. As a result, demand will keep supply levels tight.
The global commodity market is surging again, which could keep the consumer price index (CPI) high for the rest of 2022. But the White House is confident inflation will ease to 2.8% next year (pdf). Global financial markets may challenge this level of optimism.