Rising soft commodity prices, such as orange juice and live cattle, are adding complexity to the inflation scenario.
Weather-related damage and increasing global climate risks have propelled numerous agricultural commodities to surge in recent months, leading to diminished supplies.
These elevated prices further burden consumers amid persistent core inflation, excluding food and energy, which reached 4.3% in August.
This month, futures contracts for orange juice, live cattle, raw sugar, and cocoa reached their peak levels for the year. Paul Caruso, the director of commodity investments at Ancora, observed that all these markets are currently experiencing bullish trends driven by supply factors.
The S&P GSCI Softs index, a subset of the broader S&P GSCI commodities index focusing on soft commodity prices, has surged by over 18% year-to-date. A global shortage of citrus fruits and last year’s Florida hurricanes have driven a sharp increase in orange juice prices.
Challenges driving soft commodity prices surge
Brazil and Mexico, critical orange exporters, reduced their annual crop forecasts due to challenging harvesting conditions caused by higher temperatures.
The juice and live cattle futures markets reached historic highs this month, with prices hitting $3.50 per pound and $1.9205 per pound, respectively.
Shrinking US cattle herds, sustained beef demand and elevated labor and fuel expenses are propelling meat prices upward. The Midwest’s prolonged drought damaged grasslands and hay crops earlier this year, compelling some farmers to reduce their herds.
US Department of Agriculture data predicts diminishing supplies in the current and upcoming years, with potential shortages extending through 2025 and 2026 before recovery.
The increase in expenses extends to desserts, not just confined to higher prices for breakfast or lunch.
Soft commodity prices, including those for sugar and cocoa, have experienced significant surges recently. Raw sugar and cocoa prices surged, with sugar futures hitting 27.62 cents per pound, the highest since 2012.
Similarly, cocoa futures reached $3,763 per metric ton this month, marking their highest level in over a decade.
Sugar prices surged earlier in the year due to increased demand and reduced crop forecasts. Factors such as adverse weather conditions in major producing nations like India and Thailand have contributed to the upward trajectory of soft commodity prices.
India, the world’s second-largest sugar producer following Brazil, experienced a drop in sugar production due to adverse weather, contributing to the price spike.
Investors and consumers are closely monitoring the fluctuations in soft commodity prices, which can have widespread economic implications.
Darwei Kung, head of commodities and natural resources at DWS, explained that soft commodities are highly vulnerable to weather fluctuations, which can disrupt production.
He noted that this is the primary reason for the price increases, and there are no quick fixes because production capacity is limited.
Kung pointed out that since core inflation excludes food and energy, consumers may face higher daily costs than what central bank policymakers consider. This discrepancy could lead to a divergence in inflation perceptions, potentially placing more strain on consumers in the near term.
Food giants pass rising costs to consumers
Major food companies are passing on higher input costs to consumers, according to Nestlé’s CFO François-Xavier Roger. He mentioned that discussing deflation or price reductions is inappropriate due to significant gross margin declines and ongoing input cost inflation.
Nestlé is facing elevated expenses in sugar, cocoa, and Robusta coffee beans, partially offset by decreases in energy and transportation costs.
Unilever’s CFO, Grame David Pitkethly, emphasized persistent inflation in the company’s nutrition and ice cream sectors. Unilever reported a 12.6% increase in nutrition prices and an 11.5% increase in ice cream prices in late July. Ice cream is Unilever’s most discretionary category, where consumers often turn to private-label alternatives due to inflationary pressures.
The CFO emphasized the presence of extensive inflation and pricing adjustments, with consumers directly experiencing these increases. It should be noted that prices for other agricultural commodities like corn and wheat have receded from their earlier peaks this year.
However, there is some optimism as prices for certain agricultural commodities like corn and wheat have eased recently, offering consumers relief.
Corn and Wheat prices fluctuate
Corn and wheat, on the other hand, attained their highest prices for the year in January and February but have since declined. Certain analysts are relying on increased interest rates and a 6decelerating economy to dampen consumer spending enthusiasm.
Jeff Kilburg, CEO of KKM Financial, emphasized that while the harvest remains a significant factor, understanding demand is equally crucial in managing volatility.
Kilburg warned that a decline in demand could signal a forthcoming stock market pullback.