Extreme weather conditions from Asia to America, including droughts, heavy rains, and fires, are raising concerns about crop yields. This surge in staple food prices could eventually lead to higher grocery costs. The Bloomberg Agricultural Spot Index, which tracks nine major agricultural products, is expected to rise around 7% in September, marking the largest monthly increase since the Russia-Ukraine conflict in early 2022.
Although still far from the peak levels seen that year, farms from Brazil and Vietnam to Australia are struggling with floods or severe drought, affecting crops like sugar, grains, and coffee. Michael Whitehead, Head of ANZ's Agribusiness, notes that harsh weather conditions are collectively driving up food prices as supply uncertainty leads buyers to pay more.
This shift contrasts with earlier this year when abundant supplies led to lower food prices. If this trend continues, it could affect grocery prices on supermarket shelves, according to Dennis Voznesenski, Deputy Head of Sustainable and Agricultural Economics at Commonwealth Bank of Australia.
Chicago wheat futures have surged in September due to fears that bad weather in major exporting countries could further constrain global wheat supplies, which are already at a nine-year low. Australia's wheat is threatened by drought and frost, while insufficient rain in the Black Sea region limits next year's planting.
Meanwhile, soybean futures are set for their biggest monthly gain in two years as Brazil, the largest soy producer, faces its worst drought in decades. Weather forecasting agency Maxar reports that drought conditions have slowed early planting and are expected to continue in some areas. Fires in Brazil's sugarcane fields have pushed sugar futures up nearly 17% this month.
Arabica coffee prices have hit their highest levels since 2011, and usually cheaper Robusta coffee has also become almost equally expensive due to adverse weather in Vietnam impacting yields. Heavy rains during the harvest season and droughts have affected major coffee-growing regions there.
Elsewhere in Southeast Asia, aging trees are tightening palm oil supplies, pushing palm oil futures to a five-month high and creating a rare premium over soybean oil futures.
All these factors suggest the entire food market could face more difficulties, with consumers potentially paying more for groceries. As of September 24, hedge funds are betting on further increases in sugar and cocoa prices, adding to their net long positions.
JPMorgan analysts noted in a report last week that ongoing drought in northern and central Brazil could continue to threaten crop yields in this agricultural powerhouse. Michael Whitehead adds that traders are closely watching tensions in the Middle East and Black Sea regions, as well as the potential impact of the upcoming U.S. election on China-U.S. trade relations. He commented that the market is sensitive to a reasonable degree of volatility, with traders keeping an eye on both weather and political developments.
