Overall, the Bloomberg Commodity Index remains down 8% on the year with losses being led by the energy sector, not least a 56% slump in US natural gas, as well as industrial metals suffering from a so far, less commodity intensive post-pandemic recovery in China. Meanwhile, the agriculture sector trades close to flat on the year with losses in grains being offset by higher livestock prices and a massive 26% rally across the softs sector with sugar up 45% while Arabica coffee and cocoa both have rallied by more than 20%.
The global economic outlook remains clouded by recession fears and doubts about the short-term direction of US rates, not least after central banks in Australia and Canada re-started their rate hike cycle this past week. In addition, a sputtering Chinese economic recovery being less commodity intensive than previous government supported growth sprints have also been weighing on prices. However, from the recent price performance seen across the different sectors we may have seen the first signs of markets starting to bottoming out with current price levels already pricing in some of the worst-case scenarios.
In addition, the prospect for additional stimulus in China continues to gather traction following surprisingly weak PPI and CPI prints this past week. The data underscored just how difficult it has been for China to bounce back from the Covid-19 lockdown and with youth unemployment currently above 20% the need for additional support from the government and central bank may be needed to support economic growth.
El Niño has officially begun says NOAA, raising weather and crop fears
The National Oceanic and Atmospheric Administration issued an El Nino advisory on Thursday, announcing the arrival of the climatic condition. Having formed a month or two earlier than most El Niños “gives it room to grow,” and there is a 56% chance it will be considered strong and a 25% chance it reaches supersized levels, said climate scientist Michelle L’Heureux, head of NOAA’s El Nino/La Nina forecast office. El Nino strongly tilts Australia toward drier and warmer conditions with northern South America — Brazil, Colombia, and Venezuela — likely to be drier and Southeast Argentina and parts of Chile likely to be wetter. India and Indonesia also tend to be dry through August in El Niños.
Asia looks set to be in for some punishingly hot weather in the coming months as El Ninõ returns. The anticipation of this weather phenomenon starting to be felt from around July has already seen the Australian government cut its wheat production forecast for the coming season by about a third. Hot and dry weather across Asia has already up until recently been giving sugar and Robusta coffee a strong boost while adverse weather in Florida has seen the price of frozen orange juice concentrate hit a record high amid outlook for the smallest crop in 60 years.
Key crops on the move amid rising weather concerns
After weeks and in some cases months of price weakness, the grain and soybean sectors have started June with strong gains, led by growing concerns that a current dry spell across Northern Europe, the Black Sea region and parts of the US may negatively impact this year's crop production. Still down by around 20% on the year, Paris Milling wheat has led from the front, up around 7% while Chicago wheat has seen a 5.5% gain so far this month, in the process potentially creating but not yet confirmed low in the market.
Lack of rain is also hurting spring wheat in Russia, the world’s top exporter following last year’s bumper harvest, while planting of winter wheat in Argentina is facing some challenges and potential major downgrade. In addition, the fighting between Russia and Ukraine has led to the destruction of a giant dam raising fresh fears about Black Sea supplies from the war-torn area. Yet the overhang of Russian wheat supplies from last year’s bumper crop is likely to continue to weigh on old-crop prices while supporting new-crop prices through a rising premium between the two. An example being the CBOT July-December wheat spread where the new-crop December contract is currently trading 30 cents above the old-crop contract of July. A further deterioration in the outlook could see the new-crop premiums rise further.
On Friday after the writing of this update, the US Department of Agriculture released its monthly World Agriculture Supply and Demand report, and while it is still early days the market was looking for any changes in the US government production estimates for the coming season, as well as production in South America where drought in Argentina has seen corn and soybeans projections being downgraded on an almost monthly basis.
CBOT Wheat with the July-December spread inserted