Commodity prices have hit a critical crossroads in August, correcting for commodities such as oil or industrial metals within the month or the summer quarter as a whole, while the momentum of a multi-year rally in agricultural products has stalled.
Over the summer, inflationary trends in fuel and boosted by a long three-year rally in agricultural products clashed with worries about a recession and reduced demand, as well as intentions by central banks to raise interest rates further to curb inflation.
However, the messages are not encouraging for the continuation despite the summer break, because a number of factors favor the continuation of the rise in the prices of basic commodities, i.e. fuel and agricultural products, according to the monthly report of the Analysis department of Piraeus Bank.
In addition, the dollar index, i.e. the dollar against the euro and the 5 other major currencies (British pound, Swiss franc, and Australian dollar), continues to rise, weighing on European economies, with the euro contributing more than 57% at this index.
Wheat leads the uptrend
Crucial to the continuation of agricultural product prices will play wheat, not only because it saw the biggest correction of all agricultural products during the summer quarter, falling 30% but also because with its upward reaction it gained only 4.58% in August but maintaining gains of 14.60% since the beginning of the year.
In addition, wheat has a leading presence in grain prices and will affect the course of other products as well. On a quarterly basis corn fell 13.60% for example, but now looks stronger in the rally than wheat.
During the summer quarter, the agricultural commodities index (S&P) fell by 21.22%, the industrial metals index by 15.95% and the energy index by 11.55%.
The energy index (S&P) remained bearish in August as well, while, on the contrary, the agricultural products index rose 8.60%, keeping gains of 12.07% since the beginning of the year.
The index of industrial metals, however, is now negative since the beginning of the year, losing 12.66%.
Of the products of interest to Greek farmers, cotton rebounded in August with gains of 22.15% but is down 12% overall in the quarter, but maintaining gains of 20% and more since the beginning of the year.
Estimates of commodity prices
According to the Piraeus commentary, equity markets posted gains on a monthly basis in August (S&P500 +4.45%, MSCIEM +0.15%), as the easing of inflationary pressures in the US removed the possibility of a more aggressive rate hike from the Fed, with individual economic data remaining quite positive, particularly in the labor market.
In the Eurozone, the historically high inflation that forced the ECB to go on a rate hike, particularly high energy prices and uncertainty about sufficient natural gas availability, put additional pressure on economic activity as reflected in the development of leading business indicators.
Agricultural prices rose across the board, with cotton, corn, orange juice and soybeans leading the way as demand strengthened despite a stronger dollar and worries about a slowdown in global growth.
At the same time, the continuation of adverse weather conditions that prevail globally, may continue to support their prices. Comparatively reduced are the chances (60% of 86%) in the NOAA estimates for a possible continuation of the La-Ninia phenomenon, in the near future.
How will cotton and orange juice prices be affected?
Taking into account the above, as well as the continuation of the war, the grain sector (wheat, soybeans, corn) is predicted to be favored in the medium term, however an escalation in the US-China trade issue is likely to put downward pressure on the price of soybeans.
Limited production and low stocks of orange juice are likely to support its price, despite subdued demand, which is also expected for cotton, with investors trying to weigh the demand outlook against a possible global slowdown.
During the month, the index of agricultural products showed a significant increase (+8.60%) compared to the index of commodities (+1.34%). The catalyst for the above movement was probably the strengthening of demand, mainly from China.
Although overall commodities remain expensive due to the Fed and a stronger dollar, additional factors such as adverse weather conditions and renewed tension in Russian-Ukrainian relations may add to their positive returns.
Among the inhibiting factors likely to evolve, the prospects for a possible reduction in the global growth rate, as well as an escalation in US-China trade relations.