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December 18, 2012

The just-food review of 2012: Commodity swings remain part of landscape

Volatility in global commodity markets remained a significant factor for the food industry during 2012. On the one hand, adverse weather conditions hit grain harvests causing prices to spike, while on the other, over-supply has meant cocoa and sugar prices have continued to fall. Katy Askew takes a look at some of the major developments on the commodities markets over the past 12 months.

Volatility in global commodity markets remained a significant factor for the food industry during 2012. On the one hand, adverse weather conditions hit grain harvests causing prices to spike, while on the other, over-supply has meant cocoa and sugar prices have continued to fall. Katy Askew takes a look at some of the major developments on the commodities markets over the past 12 months. 

At the beginning of 2012, the outlook for grain production was largely positive. Little could forecasters know, the worst drought in 25 years was about to hit the US corn belt – an area that produces around 40% of the world crop. 

Speaking to just-food at the height of the drought in July, associate professor of agriculture at Ohio State University Matthew Roberts said the outlook for corn and soybean production in the US ranged from “mediocre to frightening”.

While weather condition eased towards the end of the year, the latest data from the US Department of Agriculture reveals around 80% of US agricultural land continues to experience drought conditions. 

The drought prompted the government to reduce its production outlook. By November, the USDA’s National Agricultural Statistics Service (NASS) had cut its production estimates for corn yields by 27.5% from those reported in May, while production estimates for soybeans have been lowered by 7% over the same period. 

And US grain producers are not alone in facing adverse weather conditions. According to Index Mundi, grain production in the Ukraine dropped by 29.9% year-on-year in the 2012 season and there is concern unfavourable weather could also hit Russian production. 

Weak grain harvests have come as particularly bad news for the global protein industry, which is heavily exposed to the swings of the commodities market through feed prices.

According to Adam Couch, CEO of UK pork processor Cranswick, escalating feed prices are one of the “biggest challenges” currently facing the pork industry. 

Like other protein groups, the company is looking to pass higher input costs down the chain to the consumer. To this end, Cranswick is currently engaged in pricing negotiations with its retail customers, Couch tells just-food. 

“The poor harvest has created a lot of problems for pig producers the world over. We have had to respond in terms of the price we paid for pigs and the retailers, we are still in dialogue, but they are very constructive conversations that we have had with them inorder to keep these producers in business in the medium to long term,” Couch says. 

However, as US protein giant Smithfield Foods has emphasised, pushing price increases through at a time when consumer sentiment is weak has a cost of its own. 

Describing a situation of “turmoil” in the protein markets during a conference call earlier this month, Smithfield CEO Larry Pope said the group’s fresh pork sales have been hit as it has increased retail prices at a time when consumer incomes are under pressure in the US. In response, consumers reduced consumption levels, Pope observed. 

“Higher priced meat, and not just pork, beef and chicken included, have certainly had some sticker shock to consumers as they are walking in the grocery store… I think everyone is concerned about the price increases that they are having to force through the retail channels. When paychecks aren’t growing [consumers] can’t afford to buy the same level when the price is changing so much.”

Higher feed costs have also resulted in higher global dairy prices in the back half of 2012. According to Fonterra’s GlobalDairyTrade event, where the New Zealand dairy giant auctions dairy commodities, prices rose by 17% between August and December. And, according to Fonterra CEO Theo Spierings, the world’s largest dairy group expects further increases in global dairy commodity prices in the first half of 2013. 

“There has been a persistent, serious drought in the United States. That has pushed up the price of grain, which in turn affects dairy production. There are also concerns about drought in the Ukraine and Russia. In South America, extreme wetness in parts of Brazil and Argentina could also depress wheat production,” Spierings said. “Given current global conditions, our forecasting anticipates global dairy prices are likely to move higher in the first half of 2013.” 

While adverse weather hit supply one one side of the ledger, causing prices to spike, favourable growing conditions have also contributed to a significant decline in sugar prices, which are down by almost one-third year-on-year, the International Sugar Organisation (ISO) suggests. 

“If you compare prices today they are around 30% lower than they were a year ago because there is a surplus. It is the second season where we have a significant sugar surplus,” Sergey Gudoshnikov, senior economist at the ISO, tells just-food.

According to Gudoshnikov, there is currently a 7m tonne sugar surplus. While Gudoshnikov describes this level as “significant”, he emphasises it only represents a small proportion of world sugar production, which stands at 125m tonnes per annum. 

Over-supply of sugar is the consequence of a number of factors, including movements in ethanol production and the energy markets as well as higher production levels. “The weather was better than it was three or four years ago. At this time, prices rose so the growers and the industry did their best to grow as much as they can. The result is over supply,” he says.

Gudoshnikov adds the sugar industry is still feeling the negative impact of the 2008 economic crisis, when global sugar consumption dropped. 

“The first reaction to the economic crisis in 2008, which coincided with an increase in sugar prices, was considerable slowing down in growth rates through consumption. It has not picked back up – what is not consumed is not consumed,” he observes. 

From a now lower base, consumption growth rates have “normalised” at about 2% globally, Gudoshnikov adds. 

However, not all food manufacturers are feeling the benefit of higher sugar production and lower subsequent prices. The Committee of European Sugar Users (CIUS) has insisted European food groups are continuing to “struggle” to find “sufficient supplies” at “reasonable prices”. 

“The sugar quota  – which restrict sales of EU beet sugar to 80% of demand – and the excessively high import tariffs are the obvious cause of this paradoxical situation,” the CIUS says. 

According to the industry organisation, which is lobbying for the EU sugar quota restrictions to be lifted, sugar prices in the EU are 64% higher than world prices as a consequence. In November, the average market price for sugar in the EU stood at EUR708 per tonne, compared to a world market average of EUR420 per tonne. 

During 2012, a supply surplus prompted world sugar prices to drop significantly while a supply shortfall resulted in a dramatic increase in grain prices. However, one important commodity appears to have struck a balance between supply-and-demand during the last 12 months: cocoa. 

According to Laurent Pipitone, director of economics and statistics at cocoa industry organisation ICCO, the cocoa industry is “more or less in a balanced situation” at the moment. 

Prior to the 2008 economic crisis, cocoa producers had struggled to keep pace with growing demand, as consumption of dark chocolate increased in developed markets and overall chocolate consumption increased in emerging markets. 

“Then the economic crisis occurred,” Pipitone tells just-food. “We had strong decline in cocoa processing in 2008 and 2009, which was down over 6%. Since then, it has recovered partly but demand from mature markets has remained flat.”

According to Pipitone, poor consumption growth in developed markets has resulted in a “shift” in the cocoa industry. “Growth is coming from emerging markets and more product is being processed in emerging markets. There are a lot of capacity increases in west Africa and Indonesia.”

Indeed, this movement was evident only last week when Swiss chocolate giant Barry Callebaut inked a deal to acquire the cocoa ingredients business of Singapore-based Petra Foods. 

While some industry watchers emphasised the hefty price tag, Barry Callebaut insisted the deal would position the group for long-term growth: increasing its exposure to emerging markets in Asia and Latin America and increasing its ability to supply cocoa powder. 

The latter point is significant because food manufacturers in emerging markets for the most part want cocoa in powder form – as opposed to butter or liquor. 

“Previously, the price of butter was higher than powder. This has reversed, mainly because most demand coming from emerging markets and they are consuming more powder-based products. There has been a change in the industry because of this. Butter was the one driving the market before the economic crisis, but now it is powder,” Pipitone says. 

However, while chocolate makers may be enjoying a period of parity between supply and demand for cocoa, as is so often the case in commodities trading, this is likely to be a short respite.

The return to growth of the chocolate sector in emerging markets has raised concerns in the industry that demand will once again increase ahead of supply, prompting cocoa prices to jump. 

“There is now a concern that demand will increase ahead of supply and that we will face a shortfall,” Pipitone suggests. According to the economist, the ICCO is forecasting that by October 2013 the sector will once again face a supply deficit that will result in higher cocoa prices in the year ahead.

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