Raw material prices have tumbled in recent weeks as agri-food commodities appear to have hit a downward inflection point.
According to Commodity Tracker from investment analysts at Jeffries Equity Research, the brokerage’s basket of commodities – which includes inputs like corn, palm oil, cocoa, wheat, meat and fruit as well as diesel, gasoline and PET – is now 14% cheaper than it was in mid-June. Palm oil was one of the main drivers of the decline, with prices dropping 39% since 15 June. Wheat prices were 25% lower than last month and corn was down 13%.
Some commodities, such as dairy, look less likely to climb down from their current highs. In this sector, Jeffries noted, ‘extremely high input prices remain’ exasperated by ongoing conflict in Ukraine. “Milk price increases so far this year have helped to offset some of these higher costs. However, they have not yet encouraged higher production, with yields remaining subdued,” the analysts observed.
Unilever – which relies on palm oil across its food, home and personal care brands – was flagged as a ‘preferred play on the upside’. “With palm oils the most deflationary, it follows that Unilever, reportedly the world’s biggest buyer, should be the biggest winner,”the analysts said.
What is driving the downward pricing trend?
In palm, Indonesia is stepping up its export levels to rebalance high inventories of the edible oil built up after the country’s three-week export ban in May. The government had issued export permits for a total of 2.4m tons under the domestic market commitment scheme and its export acceleration program as of 4 July, whilst still culling its palm oil export levy in a bid to boost shipments.
Jeffries said the global market for wheat will be marked by both lower consumption and supply which is expected to result in ‘fractionally’ lower trade and ‘slightly’ lower stocks.
Meanwhile, global production for corn is expected to grow at a time when ‘lower trade’ is expected.
This sudden drop prompted Jeffries to cut its basket price forecast for fiscal 2023 from 4% input price inflation to 2% deflation.
This ‘feels like a turning point’ compared to the spot inflation of 22% seen last year, analysts Martin Deboo, Molly Wylenzek and Feng Zhang wrote in an investor note. “A double digit decline in commodities in a month feels like a determining move, particularly when there is no sign of any uptick,” they said.
However, ‘before breaking out the champagne’ the analysts counselled against ‘too much euphoria’.
Recession risk heights
The primary reason why commentators are urging caution is a heightened risk of recession as consumption remains squeezed by a cost of living crisis. “The combination of what will remain high price levels in FY2023, allied to a potential squeeze on incomes, represents further uncertainty.”Jeffries cautioned.
Forecasters at Nomura agree that a recession now looks likely in importing including the Euro Zone, the UK, the US and Japan. This, they predicted in an investor note, will be driven by central bank efforts to control inflation and the rising cost of living.
“Increasing signs that the world economy is entering a synchronized growth slowdown, meaning countries can no longer rely on a rebound in exports for growth, have also prompted us to forecast multiple recessions,” Nomura analysts Rob Subbaraman and Si Ying Toh wrote.
Despite commodity prices coming off the boil, consumer price inflation is likely to persist as price pressures have spread to service items, rent costs and wages. They also flagged concern that, if Europe is cut off from Russian gas, the recession could be significantly deeper.