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Commodity markets undergo surgical stress test

The COVID-19 pandemic has impacted both supply and demand schedules, as economic growth falls precipitously as we have turned the world off, whilst logistics and transport has also become more challenging. Reassuringly for us, seaborne transportation has not been impacted to the same degree, and agricultural markets seem to be more resilient as food markets remain well supplied. That’s not say that the spectre of ‘food nationalism’ has not risen, particularly as trade restrictions and inventory restocking at country level, come to the fore. More economically sensitive commodities, such as industrial metals and energy have not fared so well, as airplanes are grounded and road traffic has withered.
Closer to Home
Ultimately, the degree to which the impacts on prices endure, will be a consequence of how long restrictions remain in place and hence how COVID-19 draws on global economic growth.

In relation to hyper optimized supply chains and food security initiatives, post mortems will inevitably lead to calls for ‘re-shoring’ and shorter supply chains.

Government restocking of food inventories has led to a stark contrast between agricultural markets relative to cyclical commodities.

Since January oil prices have plunged to historic lows, some benchmarks even recording negative prices as virus transmission mitigating efforts and lock downs have destroyed oil demand.

From the 2019 average of approximately 100 million barrels per day, demand has fallen to less than 10 million barrels per day.

Its not just been crude, natural rubber and platinum amongst the industrial metals have also witnessed tumbling prices, being significant inputs into the transportation industry.

Falling oil prices has led OPEC and other oil producers to cut supply an effort to support prices, even though sizable rebounds are expected in the coming year.

Coal prices interestingly have held firmer, given that its demand schedule is very sensitive to electricity production, which has been far more resilient.

Gold prices have risen as buyers have sought safe havens during financial market turbulence.

China is the marginal buyer of most commodities, and of course it has been one of the first countries to power down, particularly over the Chinese New Year celebrations.

We've always maintained though that price volatility in soft commodities is more a function of supply side considerations, given relatively stable demand patterns.

In fact, export restrictions and worsening crop conditions in certain products such as rice have led to five year high prices.

Changing demand patters to alternative plant proteins, have a seen a surge in spot activity in pulses for example.
Stress Test
The pandemic has been a significant stress test for the global economy, and supply chains in particular. Fortunately, most food markets remain well supplied, even as food security and stimulus measures in major economies have seen a spike in spot activity and demand for many basic foodstuffs. There has been some inevitable disruption to supply chains, but from our perspective, nothing beyond delays lasting a day or two, although we’re conscious that certain implications may not become apparent until until the coming certain planting seasons, where the difficulties in obtaining inputs such as fertilizer pesticides and labour reduce crop yields. The World Bank amongst other international institutions, has been very vocal in underlining the primacy of maintaining supply chains, and keep food trade flowing.

Diverging Fortunes
As borders, close, transportation costs logistics and trading costs have risen, agriculture as an asset class and the income flows which derive from it, has once more demonstrated its defensive characteristics. Whilst many commodities have seen dramatic falls in prices, government and consumer stockpiling certain foodstuffs has put a tailwind behind many goods such as soy meal, rough rice and pulses, supporting many trader’s margins.

The global economy as yet has not witnessed significant food shortages - supply chains in agricultural sectors have maintained high levels of operating capacity and disruption has been minimal. The bigger concern is the impact on domestic labour forces and agricultural commodity producing nation, more specifically, it is the human toll which needs to be considered. Both ensuring that the nutritional content of our population’s diet remains firm, rather than forced substitution to poorer quality nutrition compelled by what’s available. Reassuringly though, during one of the greatest stress tests history has witnessed, agricultural supply chains continue to function well, with pricing remaining very firm, all going to evidence the portfolio diversification benefits of ‘ag’, not to mention their defensive nature.