"Food supply could become central in 2021" interview with L'Agéfi

Which commodity sector continues to be most affected by the current pandemic?

Clearly, the energy sector has suffered the most losses, which has continued to fall sharply since the beginning of the year, with WTI still down by almost 40% over this period. It is clear that the lockdown and the fact of being confined to one's own home has affected the demand for petroleum products for most of the year. Things had stabilised somewhat during the summer, but various governments in Europe and the US are imposing new lockdowns in the face of what appears to be a new wave of infections.

With the drop in demand, production has also decreased to meet the new environment. The downward pressure on energy prices has, however, continued due to increased production in some important regions. In Libya, for example, we have seen a significant recovery in production. This should probably push OPEC+ to abandon its plan to increase production from January 2021. A plan that the organisation had envisaged earlier in the summer, when crude oil prices had recovered significantly at the end of the first lockdown.

Is there any impact of the monetary and fiscal stimulus plans on the industry in general?

These plans are resulting in massive injections of liquidity into the financial system, resulting in higher inflation expectations. Investors may not expect inflation to return next year, but probably by 2022. The inflation risk has therefore led them to allocate large amounts of capital in precious metals in general and gold in particular, which is confirmed by the massive capital flows in financial products such as gold-backed exchange-traded funds (ETFs). This is therefore essentially a financial demand for these precious metals, making it the most successful segment so far this year. On the other hand, Chinese and Indian demand for physical gold remains relatively weak.

What about industrial metals, as these are more correlated with economic activity?

Its relative resilience may seem surprising given the overall magnitude of the economic shock caused by a pandemic such as covid-19. However, this is similar to what happened during the Great Financial Crisis of 2008, when Chinese demand was a major contributor to the recovery in industrial metals prices after Beijing introduced fiscal stimulus and various domestic investment incentive programmes. Copper is particularly sensitive to Chinese demand and posted an impressive performance for the year as a whole, despite continued high macroeconomic uncertainty.

Is there also resilience in agricultural commodities?

It is interesting to note that these are not as correlated to the pandemic as other commodity sectors and have seen a significant rise in prices this year. For the most important commodities, namely soybeans, wheat and maize, they have been on a downward trend over the past eight years. Excess supply, good harvests, increased production, high stock levels all combine to keep prices low. But in the last six months or so, a change in sentiment towards these food resources seems to have been at work.

China, which recently faced internal production problems due to a number of factors, is having to rebuild stocks, particularly in the animal feed sector. Chinese imports are mainly favouring farmers in Latin America and the United States. It should also be noted that some key regions, such as the Ukraine, Russia and Eastern Europe in general, are currently experiencing particularly dry weather, and parts of the US and Latin America are seeing their harvests disrupted by climatic factors, providing additional support to the prices of the three agricultural commodities mentioned above.

As food is a key commodity for which there is a permanent demand, are there geopolitical implications behind this price increase?

Strong and resilient demand for food can be a double-edged sword. Inflationary pressures may no longer be based solely on recently implemented monetary and fiscal stimulus policies, but also on rising prices of such critical goods as food commodities. The worst inflation is that caused by the rise in the prices of these specific commodities as it hurt those who can least afford it the most, especially in emerging market countries. I think we will have to keep a close eye on this sector in the coming months.

This is reminiscent of past economic crises triggered by popular movements in some emerging countries following food crises. No?

Yes, it does. This explains why countries such as Egypt, Pakistan and other seed-importing emerging countries have recently started to increase their purchases of seeds on the markets, in order to guard against a food crisis potentially capable of provoking popular protests such as we saw during the Arab Spring in 2010 and 2011. Admittedly, the current situation is not yet comparable to that which prevailed ten years ago. Nevertheless, when I see that it is now 17 degrees in Copenhagen at this time of year, I think that this is one of the highest temperatures ever recorded for this season. So if the upward trend in agricultural prices is expected to continue, food could become a central issue in 2021, whatever the outlook. In particular, we will be watching winter wheat production in Eastern Europe and soya and maize production in Argentina and Brazil.

But are there any losers in the agricultural commodities sector?

Consider the fact that restaurant attendance has dropped across the world. As a result, coffee and, to a lesser extent, cocoa, have seen their prices plummet. Coffee has lost about 20% since the beginning of the year. It is one of the big losers in this sector, as the entire population is unable to order their usual cup made from quality beans. To add to this downward pressure, it should be noted that production has remained at relatively high levels this year.