The Agricultural Commodities Market is a market in which agricultural products are traded. The recent price increases in various agro commodities are the result of a variety of factors, including new epicenters, labor shortages, supply chain disruptions, political instabilities, natural catastrophes, and so on.
On October 25, 2021, the Bloomberg Commodity Index (BCOM), a financial benchmark intended to give diversified exposure to real commodities via futures contracts, hit a six-year high of US$ 105.8. In contrast, during 2019 before the coronavirus crisis, the index averaged just about US$ 80.
The World Bank, in its October 2021 forecast, significantly increased many agricultural commodity prices compared to the October 2020 forecast. The market sentiments during the height of the epidemic were drastically different from those seen today.
The consumer price inflation rate increased to 6.2% in October 2021, the largest 12-month increase since the period ending November 1990. The main reason for this increase was energy costs, which went up by 30%, compared to 24.8% in September. Food prices also increased, with food at home going up by 5.4%, the highest since January 2009.
The raw materials and beverages index has not increased much, but the food index has gone up by almost 35%. The fertilizer index has increased even more, going up by 113%. This is because the price of urea, a common inorganic fertilizer, has gone up from the usual $200-300 range to $613 per metric tonne.
This is going to increase the input cost for all crops significantly as farmers commence the new sowing season. This could mean that while basic food products are already more expensive, they might continue to be so in the following year. And, if farmers take the risk of holding out before buying for the next growing season in hopes that costs come down, they could end up purchasing at even higher prices.
The farmers could try to save money by cutting the application rates for fertilizers or by not using them at all. They are hoping that this will lead to a decrease in the price of crops in the future. If this does not happen, the farmers might have to reduce the amount of other products they produce in order to account for the increased cost of fertilizer. This could lead to a decrease in the quality and quantity of crops produced.
Agricultural Commodity Market Prices
In our research, we found that a number of agricultural commodities have exhibited significant price volatility over the last two years. In particular, corn and cotton prices have experienced sharp increases, while soybean prices have more modestly increased. Here is some more information on each of these commodities:
Corn: Futures prices for corn have increased by over 50% since December 2019, and are currently trading at around $5.7 per bushel. Rising crude oil prices are one determinant that could reverse the downward pressure on corn prices in the future.
Cotton: Cotton futures have been up by almost 80% since December 2019 and are currently trading at around $1.2 per pound. The main reason for this increase is tight supplies, due to factors such as pests attacking crops in India.
Soybeans: Futures prices for soybeans have increased by 40% since December 2019, and are currently trading at around $9 per bushel. The main drivers of this price increase are Chinese demand (related to trade deals) and tight supplies. However, some market analysts believe that prices will revert to the average of $10 per bushel by the end of the year.
Sugar: Sugar futures have risen more than 50% since December 2019 and are currently trading at around 20 cents per pound. This increase is due to expectations of lower global sugar supplies owing to poor weather conditions.
Effect of the Pandemic
Agricultural commodities are an important part of the world economy, with shipping playing a critical role in their transportation. The Covid-19 pandemic has caused major changes in buying patterns, resulting in volatility in prices.
The pandemic has created uncertainty and unevenness in the market, leading buyers to prefer the spot market over long-term contracts. In some cases, suppliers have been forced to back out of contracts when spot prices are much higher than contract prices.
Overall, the pandemic has been a major challenge for small and medium-sized enterprises (MSMEs), who have struggled to keep their businesses afloat. Processors who buy, process and sell agricultural produce have been impacted by prices on both the buying and selling side. However, larger companies that have the infrastructure to grow, process and store crops have been able to weather the pandemic better.
As the pandemic continues, prices of agricultural commodities are expected to rise and fall as supply and demand fluctuates. Larger companies that have a hold on the entire supply chain will be better positioned to survive these fluctuations. MSMEs, on the other hand, will continue to face challenges in the market.