Macro Analysis /

ETM soft commodity overview - Food price inflation expected to remain elevated

  • Shift in US production from corn to soybeans

  • Heavy rainfall in South Africa and the impact it has had on the country’s crop

  • Mounting tension between Russia and Ukraine and how that has driven up commodity prices

Alexa Archibald
Alexa Archibald

Commodities Analyst

ETM Analytics
31 January 2022
Published byETM Analytics

This report provides an overview of the main themes at the moment in the soft commodity space. These include the shift in US production from corn to soybeans on the back of surging fertiliser prices, heavy rainfall in South Africa and the impact it has had on the country’s crop and mounting tension between Russia and Ukraine and how that has driven up commodity prices.

2022 US acreage decisions

Farm futures has projected 2022 corn acreage at 90.4 million acres and soybean acreage at 92.4 million. This will be the second time in US history that more soybeans will be planted than corn. Moreover, this will be the largest soybean crop on record if these projections happen. These large harvest predictions are not expected to cause a price collapse because global and domestic demand for US grains remains robust. However, there are concerns that China's demand for soybeans may not be as high as it is typically. However, a lot can change in the next eight to ten weeks before planting begins. Drought relief and lower input prices are the best hopes for potential acreage shifts from this forecast. At any rate, expect 2022 to be an exceptional year for US agriculture. Soybeans prices have reached seven-month highs as concerns about the South American crop persist. Dryness in parts of Brazil, the world's top soybean shipper and grower, is putting harvests at risk of a shortfall, a development that could boost global demand for US beans.

Impact of rain on South African crops

At the end of 2021, the intention was to plant 4,3 million hectares of summer crops. This figure was welcomed as some feared the rising input costs – fertiliser and agrochemicals. The increases in these input costs resulted from supply chain constraints and disruptions in major global fertiliser and agrochemical producing countries like China, India, the United States, and Russia. This means that South African farmers incurred higher costs in the 2021/22 season, hoping that a favourable weather outlook and higher commodity prices would be financially rewarding. But as we have now observed, the excessive rains have delayed plantings in some regions, and in others, damaged the crops. Farmers are estimated to have planted 4,21 million hectares, which is 3% less than their intentions at the start of the season. This means that the 2021/22 season could be a financially costly year for farmers who experience losses in yields due to floods.

The chart shows the percentage of moisture in the top 1 meter of soil in South Africa. From December 2021, we can see the moisture has been increasing. This trend is expected to continue as the La Nina weather pattern, which is bringing excessive rain to South Africa, is expected to stay for the next few months. The weather in the next few months is critical in determining the number of summer crops that are planted and harvested.

Russia-Ukraine tensions impact on commodity prices

If the West decides to impose sanctions on Russia, this could have a far-reaching impact on the commodities complex. It could potentially lead to a significant tightening in energy, metal, and agri markets. Any interruption to the flow of grain out of the Black Sea region is likely to have a significant impact on prices and add further fuel to food inflation at a time when its affordability is a major concern across the globe following the economic damage caused by the COVID-19 pandemic. There are four major exporting countries, Ukraine, Russia, Kazakhstan, and Romania, that ship grains from ports in the Black Sea, which could face disruptions from any military actions or sanctions.

Ukraine is a major supplier of staple crops such as wheat and corn. Mounting tensions between Ukraine and Russia are driving prices higher and adding more pressure on global food inflation. Wheat futures in Chicago and Paris have jumped about 10% since mid-January, while corn is near the highest since June.

Soft commodity speculative market positioning:

The latest data from the US Commodity Futures Trading Commission provides some insight into the speculative market’s positioning on wheat, coffee, soybean and corn. Wheat markets seem to be becoming less bullish and are starting to move towards a more neutral positioning. Looking ahead, it will be interesting to see if the potential supply issues from Ukraine and Russia will push the market back to be more bullish.

Both the corn and soybean markets are bullish due to supply chain issues and rising input costs such as fertiliser. As countries start to recover from the impact of COVID-19, supply chain issues are expected to moderate. However, there are still some supply concerns due to weather issues in South America which could cause the price of corn and soybeans to remain elevated and the speculative market outlook to stay bullish.

The speculative market for coffee is net bearish, but this trend is expected to reverse and move towards a more neutral position. In 2021 the Brazilian coffee market was affected by severe droughts and decreasing yields. The outlook for Brazilian production remains gloomy as extreme weather conditions persist.

Bottom line: Between the geopolitical pressure caused by heightened tensions between Russia and Ukraine and the extreme weather in South Africa and South America caused by La Nina, this is quite a turbulent time for soft commodities. Wheat prices have risen to four-month highs, and if supply from Russia and Ukraine is disrupted, these prices are expected to continue to rise. This will therefore result in food inflation remaining elevated in the months ahead. The impact of weather on the size of crops such as soybean and corn planted and the quality of the crops harvested is also going to impact supply and could potentially result in some shortages in the coming months.