The year 2023 has witnessed a mammoth rally in soft commodities, with futures contracts on orange juice, cocoa, coffee, and sugar experiencing significant gains. The driving force behind these soaring prices is the extreme weather and supply concerns triggered by the El Niño phenomenon. This article critically examines the potential impact of this rally on consumer pockets and provides insights into the connection between El Niño and the rise in prices of specific raw materials.
El Niño is a naturally occurring climate pattern characterized by a rise in sea temperatures in the eastern Pacific by 0.5 degrees Celsius above the long-term average. This pattern leads to an increase in storms and droughts, with its effects typically peaking in December. However, it takes time for these effects to spread globally. Forecasters predict that 2024 may be the year in which humanity surpasses a critical warming threshold due to the lagged impact of El Niño. The dryness caused by El Niño in Southeast Asia, India, Australia, and parts of Africa has contributed to the price rally in soft commodities such as sugar, coffee, and cocoa in 2023.
According to Carlos Mera, the head of agri commodities market research at Rabobank, El Niño is likely to impact consumer prices in the coming months. Mera emphasized the connection between El Niño and higher sugar prices, as major sugar exporting countries such as Thailand, India, and Australia experience drier than normal conditions. While sugar prices may have already been passed on to consumers, Mera expects a significant increase in retail prices of chocolate due to the impact of El Niño. He noted that the cocoa industry operates on a forward selling model, with cocoa being sold a year in advance. Therefore, the cocoa used in chocolate products purchased today was likely bought at a much lower price a year ago. Consequently, the impact of price surges in cocoa has not been immediately felt by consumers.
The rally in soft commodities has been particularly pronounced in orange juice, cocoa, coffee, and sugar. Orange juice futures climbed an astounding 80% in 2023, reaching an all-time high in late November. This surge was primarily driven by the devastation caused by hurricanes and disease to citrus crops in Florida. Market analyst Dave Reiter of Reiter Capital Investments LLC expressed astonishment at the exceptional profit potential of this trade, citing the unpredicted high price of orange juice. However, he also cautioned that the eventual crash in orange juice prices would be unprecedented.
The price of cocoa, a pivotal ingredient in chocolate production, soared by 64% in 2023, hitting 46-year highs. The scarcity of West African supplies due to heavy rains and issues like fungal disease contributed to this significant price surge. In contrast, the impact of El Niño on cocoa prices is expected to be relatively weaker compared to other commodities.
The robusta variety of coffee experienced its highest price level in 15 years on December 15, 2023. This increase can be attributed to various factors, including El Niño-related droughts and supply concerns. Despite a 13% rise in sugar prices in 2023, the gains have been somewhat limited after hitting a 12-year peak in September. However, the potential adverse effects on crops due to El Niño in early 2024 may further impact sugar prices.
The mammoth rally in soft commodities driven by El Niño-related weather patterns has significant implications for consumers. While sugar prices have likely already been passed on to consumers, the price of chocolate is expected to see a substantial increase at the retail level. The impact of El Niño on specific commodities varies, with sugar being more directly affected and cocoa experiencing a weaker connection. The price rally in orange juice, cocoa, coffee, and sugar reflects supply concerns, extreme weather conditions, and the lagged effects of El Niño. The consequences of this rally are expected to be felt by consumers over the coming months, highlighting the need for awareness and preparedness for potential price increases in various products.
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