Rising freight rates and the increasing likelihood of an occurrence of the La Nina weather phenomenon are among the risks that farmers, investors and commodities traders face in 2018, according to a leading agricultural lender. Bumper global harvests in recent years have provided importers and buyers with lower prices of grains and oilseeds. However global inventories are slowly declining making markets more susceptible to volatility, the supply and demand situation for many agricultural commodities is tightening. There are clouds of uncertainty on the horizon and supplies are not enough to sustain prices should a major event like La Niña disrupt major agricultural areas, such as the US and South America.
Among the risk factors that could push up global food prices are global freight costs as well as oil prices. Earlier this month the UN Food and Agricultural Organization forecast that the world’s food import bill this year would hit the second highest on record partly because of rising shipping costs. The Baltic Dry index — an indicator of global bulk commodity freight costs — has increased as much as 66 per cent this year as the availability of new bulk freight supplies has slowed. Bulk freight rates have been trending higher since early 2016, after declining after the 2008 financial crisis, which coincided with the increased delivery of dry bulk vessels.“We are likely to see a shift in the movement of commodities worldwide, with higher freight rates eroding the competitiveness of exports which come from farther afield,” said the Rabobank report. Weather is another risk factor that could bring volatility to grains and oilseed prices. The US National Oceanic and Atmospheric Administration is forecasting a 65-75 per cent chance of la Niña developing this year and lasting into the first quarter of 2018. Depending on its strength, the weather phenomenon could cause dryness in grain areas in the Americas and flooding in Asia’s palm oil plantations.
Traders and farmers will also need to keep a close watch on the movements of speculative investments which have risen sharply. “Speculators have been very active in agri commodity markets in 2017,” said the report, noting that many had placed bearish bets across grains, oilseeds and other agricultural commodities. Hedge funds and other speculative investors built record bearish positions in agricultural markets this year, including arabica coffee, sugar, cocoa, and soyabeans. The increase in trend-following algorithmic system funds have added to the growing positions, according to traders and brokers. These bets “could exacerbate commodity price movements going forward, providing both opportunities and risks” for food and agricultural businesses, said Rabobank. Among individual commodities, the bank expects global demand for coffee to continue to grow, leading to a slightly bullish view on 2018 prices. Arabica coffee, currently at about $1.25 a pound is forecast to trade at an average of $1.34 in the second half of next year. Demand for cocoa also continues to rise, driven by developing nations’ taste for luxury commodities, although large global stocks mean price spikes are unlikely. The outlook for wheat is bullish relative to current prices at about $4.20 a bushel because of an expected 7.5m tonne global supply shortage, which excludes China. Wheat acreage this year was at a record low this year, and prices are forecast to reach an average of $4.70 in the fourth quarter of 2018.