Soft commodities: orange juice squeezed by extreme weather

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Britain’s summer may be conforming to the stereotype, but elsewhere in the world climates are growing more extreme. A “heat dome” in southern Europe led to wildfires and droughts. Record temperatures are threatening global crop yields, sparking fears of food shortages. Orange juice is one example that is part of a larger trend. Hurricanes and tree disease in the sunshine state of Florida pushed juice prices to record highs this week.

Commodities can be a daunting prospect for new investors. Agricultural markets range from cooking oils to live pigs. These products are typically known as soft commodities. Trading mostly takes place on futures and options exchanges.

Contracts here are not always for delivery, meaning a buyer will never take in an actual physical shipment of the product. Instead, they are placing positions, either for hedging purposes on behalf of farmers or to speculate on price movements.

Orange juice contracts refer to frozen concentrated orange juice futures traded on the Intercontinental Exchange in New York. The price of these, now at around $3 per pound in the spot market, has increased by more than half this year. The reason for this is the disastrous orange harvest in Florida this year, expected to be about a tenth the size it was a decade ago. That explains record US imports of orange juice from Brazil, the world’s largest producer.

One major role played by futures markets is the formation of views on supply and demand over time. Contracts are specific to particular dates in the future. For example, orange juice futures cover January, March, May, July, September and November over the next few years. A snapshot of these prices can be used to form a curve. Normally, the curve will slope upward, indicating prices are expected to rise in the future. 

Currently, however, the orange juice futures curve shows that near-term contracts are more expensive than later dates. This illustrates the looming supply crunch from Florida’s poor harvest and the spike in current prices. In technical jargon this type of curve is known as backwardation. The normal shape is a contango.

Uncertainty around weather, especially the effects of El Niño’s return, will cause further volatility in soft commodity markets. Sugar, Robusta coffee and soyabean futures markets are all similarly backwardated due to near- term supply fears, notes Jonathan​ Parkman of broker Marex. 

El Niño is a weather event declared when sea temperatures in the eastern Pacific rise 0.5C above the long-term average. It can lead to more storms and droughts. Peak disruption is expected to arrive in December.

The cocoa market, which is also backwardated, may be particularly susceptible to such changeable weather. Prices are also at record highs as the ingredient used in chocolate making is expected to enter the third consecutive year of undersupply. Wet weather and disease in the Ivory Coast and economic turmoil in Ghana are to blame.

The International Cocoa Organization more than doubled the deficit it forecasts this season to 142,000 tonnes. The effects of El Niño are expected to hit crops in Indonesia and Ecuador, which are particularly exposed to weather-related disruption. Cocoa prices could easily rise further. The data on futures positions shows that speculative bets on higher prices are at record highs.

Futures are largely the realm of experienced investors. Dealing accounts with specialised brokers are required in order to access them. Options markets are similarly guarded. Spread betting firms also offer commodity exposure via contracts for difference.

A more straightforward way into the market is via exchange-traded commodity funds, which track the price of a commodity. Price moves, like the weather driving them, are expected to be turbulent.

Clarkson: the shipping forecast

Shrinking global trade volumes have dented freight rates. Shares in UK shipbroker Clarkson are down almost one-third from their 2021 peak.

But Clarkson, which sells sea freight space, predicts a rise in shipping rates this year due to a winning combination of energy insecurity, green transition and squeezed capacity.

The war in Ukraine resulted in oil and fuel shipments being rerouted, which is boosting tanker rates. Tonne mileage, a measure of freight transportation output, rose by almost 10 per cent and 8 per cent for crude and product carriers respectively in the first half of this year, according to data from trade body Bimco. It expects an additional three percentage points in demand growth this year for both the crude and product tanker market.

As customers and investors become more interested in emissions, demand is shifting too. Use of modern, cleaner ships is forecast to rise. Already, about 60 per cent of the world order book by tonnage is for vessels powered by alternative fuels such as natural gas.

Add this to the crunch in global shipbuilding capacity and earnings from tanker broking could rise. The signs are already good. Clarkson’s revenues rose to £321mn in the first half of the year, up 20 per cent on the previous year and ahead of expectations.

Can it continue? Clarkson says there are 40 per cent fewer large shipyards today than a decade ago. Most are building container ships and natural gas carriers. Total global tonnage is expected to rise by just 2 per cent next year, the slowest increase in two decades. Orders for new crude oil and product carriers are at historic lows. Capacity shortages could keep Clarkson revenues rising.

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