How Have Agricultural Commodities Weathered the Coronavirus?
Lockdowns and supply and demand shocks had a variety of impacts on the prices of agricultural commodities this year.
Understanding what moves commodity prices can help one understand how the world works.
The agricultural supply chain includes thousands of businesses, from farmers, to producers of pesticides and machinery, to buyers, processors, and food retailers.
It includes technology providers who improve decision-making, from machine learning platforms to blockchain apps.
Market moves in agriculture also drive futures trading. And since the coronavirus has spread, there’s been a rapid rise of consumer interest in trading.
The popularity of government-regulated brokers that provide low-cost contract opportunities for those who want to learn how to trade at home is even related to agriculture: retail traders can choose from contracts on sugar, corn, soybeans and other commodities.
What Is an Agricultural Commodity?
Agricultural commodities are the staple crops and animals produced primarily for consumption (either directly or through products produced with these commodities).
A fraction of these commodities are used in industrial production (e.g., waxes) and energy (e.g., ethanol).
Interestingly, US law has a very specific definition of what is considered an agricultural commodity and what is not.
The Prices of Agricultural Commodities
Agricultural commodities prices are heavily affected by:
- Geo-political events, such as trade wars and currency wars
- Supply and demand
As of the middle of December these are some key price changes in commodities futures:
|Commodity||YTD price change|
Most agricultural commodities suffered steep price declines during the lockdowns. Many have recovered.
But many countries are entering the winter season and another wave of the coronavirus is expected. Let’s review how the first wave of the virus impacted prices.
Causes of Declines in Prices
Many restaurants were shut down initially and later some limited their operations to take-out orders and deliveries. The net result was a decline in business, and this is one of the main drivers of, for example, the decline in milk consumption.
The shelter-in-place orders reduced transportation significantly, as fewer people are driving to work, for errands, or to get together with others. Ground transportation isn’t the only sector affected; many are flying less as well.
This has resulted in a significantly lower level of demand for oil. However, much of the oil sold is mixed with ethanol, which is a corn product.
Thus the decline in transportation negatively affected corn prices.
Positive Trends in Agricultural Commodities
Though there was a major drop in price for many agricultural commodities, many have rebounded and not all suffered declines.
For example, rice and wheat are staple crops on which a vast majority of the world relies on for food. Demand is skyrocketing as countries stockpile these goods to help protect their food supplies.
Orange Juice Beats US Treasurys
Orange juice futures are up 22% year-to-date edging out 20+ year US Treasurys (at a YTD increase of 16%) and coming in just after gold, which enjoyed a 23% increase this year.
Factors driving the price up included poor weather affecting the Brazil crop and increased demand from shoppers wanting to boost their immunity by stocking up on products containing Vitamin C.
Transportation bottlenecks have affected prices, too.
Frozen orange juice futures are traded on the Intercontinental Exchange (ICE) in the U.S.
Volatility in Livestock Futures
Additionally, the virus resulted in many meatpacking plants closing due the virus spreading rapidly among employees.
In mid-April, delivery of lean hogs plunged to a 25-year low. By the first week of May feeder cattle futures were down 12%, following four months of further declines.
This occurred even as wholesale pork and beef prices were rising.
- Year-to-date lean hogs are down 7% and cattle are down over 4%
- In the current quarter, lean hogs are down 9% and cattle are down 1%
With the new wave of the coronavirus arriving expect continued volatility in livestock prices.
Responses to Changes in Supply and Demand
Supply chains take time to adjust to disruptions. The pandemic spread quickly, and there is a lot of uncertainty as to when things will go back to normal.
This unprecedented uncertainty makes it extremely difficult for producers to make decisions. For example, some countries are re-instituting lockdowns. Uncertainty is terrible for economic growth.
Agricultural commodities have been affected by the coronavirus pandemic. But not all commodities have responded the same way.
In fact, some (such as rice and orange juice) have seen their prices rise significantly.
Prolonged uncertainty along with continued supply and demand issues will continue to impact this sector.
(Note: commodities prices cited above are based on The Wall St. Journal tracking of continuous front-month futures.)