After a prolonged period at subdued levels and a difficult 2017, global commodities prices may be subject to volatility in the coming year, according to Rabobank.
One of the biggest threats is the weather system La Niña, which currently has near-75 percent chance of developing over the northern hemisphere.
“Should it develop further, La Niña could be a significant source of price volatility for commodities – ranging from palm oil in South-East Asia, where above-average rainfall and isolated flooding can take place, to row crops across the Americas, where dryness can occur in southern US states and parts of Argentina and southern Brazil,” the Netherlands-based lender said in a report.
Still, the authors said they were cautious about placing “too much weight just yet” on the impact of a La Niña weather event, since conditions could diminish quickly as they did in late 2016.
“Higher freight rates could erode the competitiveness of exports which come from further afield”
Another factor that could affect food prices next year is the increase in freight rates.
“The Baltic Dry Index – an indicator of global bulk commodity freight costs – has increased by close to 60 percent since January 2017 as the availability of new bulk freight capacity has slowed,” according to the report.
Rising crude oil prices, which have exceeded $60 per barrel, are also adding to the increase in freight rates, which the bank expects will continue to rise in the coming years. “As a result, we are likely to see a shift in the movement of commodities worldwide, with higher freight rates eroding the competitiveness of exports which come from further afield.”
Politics and policy could also affect commodity trade flows as well as foreign currency fluctuations, according to Rabobank.
In the case of the former, the report cited recent changes in trade agreements between the EU and Canada, Japan and the EU, as well as uncertainty regarding the future of NAFTA. In terms of foreign exchange, Rabobank expects the US dollar, which has been trending steadily downward for most of 2017, to gain ground due to rising interest rates and expectations surrounding tax reform legislation which US Congress is trying to finalize. If the dollar does strengthen against other currencies, it could have a chilling effect on US exports.
A clearer picture emerges for cocoa and coffee, for which the bank expects demand to remain strong.
“As ever, various factors are at play when looking at prospects for next year, but in the case of coffee and cocoa, prices are supported by rising demand for these luxury commodities, particularly from emerging markets,” said Stefan Vogel, one of the report’s co-authors.