Agricultural markets: Hoarding and delivery logistics in focus

A prolonged supply disruption now risks feeding through to higher prices in general. This at a time where the market already has done a 180 on inflation expectations after the US Federal Reserve on Monday rolled out some of its heaviest artillery to announce ‘open ended’ QE. It was a reminder of the moves they made in March 2009 which finally succeeded in stabilizing the global markets. The actions back then helped add some fuel to a 85% rally in the Bloomberg Agriculture Sub index from 2009 to 2011. The rally which was most pronounced in wheat, one of the world’s most important food stables, inadvertently helped trigger the Arab Spring in early 2010.

As the number of countries and cities under lock down continues to grow this is a development that requires close attention. It raises the potential for commodity prices being supported despite the oncoming recession. In other sectors we are seeing these developments supporting metals from copper to gold and platinum/palladium.

Arabica coffee and CBOT wheat have received most of the attention with both trading up strongly during the past couple of weeks. Coffee due to logistical problems in South America with Bloomberg reporting that: “Brazil’s Sao Paulo state will begin a 15-day quarantine from Tuesday, while Colombia has put its entire population on a three-week lockdown to stem the spread of the virus. El Salvador President Nayib Bukele also ordered the closure of all non-essential businesses through April 3”

Wheat because global stay at home consumers have been hoarding flour-based products from bread to pasta and cookies. Just like the pandemonium seen in the gold market this week due to logistics it is important to stress that the world has not suddenly run out of supplies but we are facing a period where goods may struggle to reach their destinations. Other countries like China has been adding to its strategic reserves while some producers have restricted their exports in order to preserve domestic stocks.

Orange juice has been another overlooked commodity which has suddenly sprung back into life. Stay at home US consumers have been stocking up on frozen orange juice and the rally this past week has been the most aggressive since 2015. Normally price spikes like these are mostly associated with periods of frost scares in Florida (Remember the comedy film Trading Places from 1983).

Not all agriculture commodities are winners with cotton being a prime example. The fibre is most often spun into yarn or thread and used to make a soft, breathable textile. With thousands of brick-and-mortar stores closed around the world, the demand for clothing has collapsed and retail outlets are seeing an unprecedented build in inventory.

Apart from trading the individual commodities there a several exchange traded funds that provide a broader exposure to the agriculture sector. Measured in market cap the DBA:arcx is the most popular followed by AIGA:xlon. They track different indices and have different compositions, both in terms of which futures contracts and how many they track. More details on the individual can be found by Google their names.