The Mammoth Rally in El Niño-Exposed Raw Materials: Implications for Consumers

The Mammoth Rally in El Niño-Exposed Raw Materials: Implications for Consumers

The year 2023 has witnessed a mammoth rally in soft commodities, specifically orange juice, cocoa, coffee, and sugar, with prices soaring due to extreme weather conditions and supply concerns associated with the El Niño phenomenon. This rally is expected to have a significant impact on consumers worldwide, leading to higher prices for various food products. Carlos Mera, the head of agri commodities market research at Rabobank, emphasizes the potential price surge in chocolate and highlights the importance of monitoring El Niño’s effects in the coming months.

El Niño is a naturally occurring climate pattern characterized by a rise in sea temperatures in the eastern Pacific, leading to more storms and droughts. This phenomenon returned earlier in 2023, contributing to the rally in soft commodity prices. The effects of El Niño tend to peak in December, but they gradually spread across the globe. Forecasters predict that 2024 could be the year when humankind surpasses a critical warming threshold due to the lagged effect of El Niño.

The dryness caused by El Niño has significantly impacted sugar, coffee, and cocoa production in Southeast Asia, India, Australia, and parts of Africa. Consequently, Rabobank’s annual outlook for 2024 suggests a rally in prices for these commodities. However, the Dutch bank also anticipates a substantial decline in global food price inflation after years of soaring prices. Nonetheless, it warns that El Niño may adversely affect several crops early next year, while some crops, particularly those in the United States, southern Brazil, and Argentina, could benefit from the phenomenon.

Orange juice futures experienced an astonishing 80% increase in 2023, reaching an all-time high in late November. This surge was primarily due to the devastation of citrus crops in Florida caused by hurricanes and disease. Trader Dave Reiter of Reiter Capital Investments LLC expressed surprise at the unexpected profit potential of this trade. However, he also warned of an eventual crash in orange juice prices that may surpass previous records. The volatile nature of orange juice prices makes it challenging to predict the commodity’s future trajectory accurately.

Cocoa, a crucial ingredient for chocolate, witnessed a significant jump of 64% in price this year, reaching 46-year highs. The main causes of this surge were heavy rains and issues such as fungal disease significantly impacting West African cocoa supplies. Unlike sugar and coffee, the impact of El Niño on cocoa is expected to be relatively weaker. Furthermore, the unique dynamics of the cocoa market, with forward selling and advance purchasing, mean that higher cocoa prices may not immediately translate into higher chocolate prices for consumers.

El Niño has a direct relationship with higher sugar prices as the weather pattern tends to create drier-than-normal conditions in major sugar-exporting countries like Thailand, India, and Australia. Consequently, sugar prices have risen by 13% in 2023, even after paring gains since reaching a 12-year peak in September. The increasing consumer demand for sugar, coupled with constrained supply due to El Niño, poses a significant challenge for consumers worldwide.

While soft commodity prices have experienced a substantial rally in 2023, it is unclear how long these elevated prices will last and how they will affect consumers. Rabobank’s Mera points out the forward-selling practices in the cocoa industry, which means that higher cocoa prices may not be immediately felt by consumers. However, the potential for a significant increase in chocolate prices remains.

The mammoth rally in El Niño-exposed raw materials in 2023 has significant implications for consumers. Soft commodity prices, including orange juice, cocoa, coffee, and sugar, have soared due to extreme weather and supply concerns. The impact of El Niño on crop production and availability has led to increased consumer prices and the potential for even higher prices in the future. As consumers, it is crucial to monitor these developments closely and be prepared for potential fluctuations in food prices.


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