Surging Soft Commodity Prices Complicate Inflation Picture
Rising prices for soft commodities, such as orange juice, live cattle, raw sugar, and cocoa, are adding complexity to the inflation landscape. These agricultural commodities have experienced significant price increases in recent months due to weather-related damage and rising climate risks worldwide, leading to tighter supplies. This surge in prices further burdens consumers’ wallets at a time when core inflation (excluding food and energy) stands at 4.3% in August.
Supply-Driven Bull Markets
Futures contracts for orange juice, live cattle, raw sugar, and cocoa have all reached their highest levels of the year. Paul Caruso, director of commodity investments at Ancora, describes these commodities as being in “supply-driven bull markets” currently. The S&P GSCI Softs index, which measures only soft commodities, has already surged over 18% this year.
Orange Juice and Live Cattle
The price of orange juice has skyrocketed due to a global citrus supply shortage caused by hurricanes that hit Florida last fall. Brazil and Mexico also reduced their estimated orange crop yields due to warmer temperatures making harvests more challenging. The juice futures market reached a record $3.50 per pound this month. Similarly, live cattle futures hit a record high of $1.9205 per pound.
Meat Prices and Shrinking Cattle Herds
The soaring meat prices are driven by shrinking U.S. cattle herds, continued beef demand, and higher labor and fuel costs. A prolonged drought earlier this year damaged grasslands and hay crops in the Midwest, forcing some farmers to cull their herds. The U.S. Department of Agriculture predicts declining supplies this year and potentially through 2026 before supplies are replenished.
Surging Raw Sugar and Cocoa Prices
Raw sugar and cocoa prices have also surged in recent months. Sugar futures reached their highest level since 2012 at 27.62 cents per pound, while cocoa futures soared to $3,763 per metric ton, the highest in over a decade. Rising demand and extreme weather leading to downward crop revisions in key producing countries like India and Thailand have caused the spike in sugar prices.
Weather Sensitivity and Inflation Impact
Darwei Kung, head of commodities and natural resources at DWS, explains that soft commodities are particularly sensitive to weather changes, which can disrupt production. This sensitivity to production rather than demand contributes to the price increases. Kung also notes that core inflation calculations do not include food and energy, meaning consumers may experience higher daily prices than what central bank policymakers consider.
Rising Input Costs for Food Companies
Food companies are passing on their rising input costs to consumers. Nestlé’s chief financial officer François-Xavier Roger highlighted increased costs for sugar, cocoa, and coffee beans. Unilever’s chief financial officer Grame David Pitkethly mentioned that inflation is still present in their nutrition and ice cream categories. Both executives emphasized the impact of rising prices on consumers.
The Outlook for Consumers
The outlook for consumers is mixed as prices of other agricultural commodities like corn and wheat have fallen from their earlier highs this year. Some analysts believe that higher interest rates and slower economic growth could curb consumer appetites, potentially leading to a pullback in stocks.
Hot Take: The Challenge of Rising Soft Commodity Prices
The surge in soft commodity prices, driven by weather-related damage and climate risks globally, poses challenges for consumers and the inflation landscape. Rising prices for orange juice, live cattle, raw sugar, and cocoa add an extra burden to consumers’ wallets amid stubborn core inflation. These supply-driven bull markets for soft commodities have seen futures contracts reach record highs. Additionally, shrinking cattle herds, extreme weather, and downward crop revisions contribute to soaring meat, sugar, and cocoa prices. The weather sensitivity of these commodities disrupts production and affects prices. While food companies pass on rising input costs to consumers, prices of other agricultural commodities like corn and wheat have fallen. It remains to be seen how higher interest rates and slower economic growth will impact consumer spending.
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