Commodity Markets, a return to normality (almost).

By Corinna Olearo,

Head of Commodity Research & Price Risk Management, Nestlé

Please note that this article is intended to be descriptive of historical events and the content should not be interpreted as projections of future outcomes. All opinions expressed are solely my own and do not reflect the views of my employer.

The turbulence that defined the commodity markets between 2020 and 2022, where many markets reached their highest levels in a decade or even surpassed historical peaks, now appears to be a distant memory. However, two markets stand out as exceptions to this trend: the price of robusta coffee is currently at its highest level in 30 years, and the cost of cocoa has reached unprecedented levels.

A return to normality

The factors contributing to exceptional commodity supply and demand shocks in 2020-2022 have gradually diminished, resulting in a noticeable market decline over the past 18 months.

The global pandemic has ended, as has the supply chain congestion caused by various lockdown measures. According to the USDA, trade from the Black Sea region, which accounts for 30% of global grain exports, has nearly returned to pre-Russian invasion levels in Ukraine. Despite ongoing geopolitical conflicts, global trade has demonstrated resilience, even in the face of the recent crisis in the Red Sea region.

Expectations of a robust economic recovery in China following the COVID-19 pandemic have disappointed, leading to limited imports of raw materials, particularly metals, by the world’s largest commodity importer. Moderate economic growth in Europe and mild winters experienced in 2023 and 2024 have also contributed to lower prices for energy and energy-intensive materials, such as fertilizers.

Currently, the prices of cereals, vegetable oils, natural gas, and metals have fallen close to the average of the last ten years after peaking in 2022. Even the prices of those commodities required for the energy transition, lithium and nickel, are well off the 2022 peak.

Even price volatility has returned to historical levels after a record high in 2022.

Given that the main macro-factors that previously drove sustained and general growth in commodity prices have faded away, what is happening to the coffee and cocoa markets?

The coffee and cocoa market

Robusta coffee prices have been rising steadily since the beginning of 2023, reaching their highest levels since 1995 in January 2024. Arabica coffee is also at historically high levels, although 30% lower than its peak in 2022.

The current dynamics in the robusta coffee market can be attributed to the elevated prices of Arabica coffee, which have widened the structural price difference between the two types of coffee. Over the past three years, the cost of robusta has averaged $2,000 per metric ton less than Arabica, resulting in a gap of $3,500, compared to an average of $1,450 over the previous ten years.

This significant price disparity and reduced purchasing power in countries heavily affected by inflation have shifted demand towards more affordable coffee options. Vietnam, Indonesia, and Brazil have not been able to meet this increased demand with a sufficient increase in production, leading to an imbalance between supply and demand.

In the cocoa market, on the other hand, a decrease in production triggered the rise in quotations to record levels in New York and London. Ivory Coast and Ghana production (70% of world production) was limited by unfavourable climatic events, the reduction of fertiliser use due to high prices in 2021-22, the spread of a virus affecting cocoa bean trees, the low yield of plantations in Ghana due to the general advanced age of the trees.

The resulting supply and demand imbalance for three consecutive seasons triggered the run-up in quotations, which have risen 150% since early 2023 and 50% in the last two months.

Commodities are historically characterized by unexpected shocks in demand or supply, which market dynamics usually correct in the short or long term. However, this period may be relatively more prolonged in the case of cocoa. The supply response to high prices is slower than for crops such as cereals, which are sown every season.

Cocoa trees are replanted about every 25 years, and producing their first fruits takes 5-6 years. Production is mainly concentrated in West Africa, where the government sets farm-gate prices at the beginning of each season. Farmers have not yet felt the price increase since October, limiting investments for the next harvest.

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