Inflation is being complicated by rising prices for soft commodities ranging from orange juice to live livestock.
A variety of agricultural commodities have risen in recent months, owing to weather-related damage and growing climate concerns throughout the world, which have resulted in tighter supply. Higher prices aggravate consumers’ wallets at a time when core inflation, excluding food and energy, remained persistent at 4.3% in August.
This month, futures contracts for orange juice, live cattle, raw sugar, and cocoa all reached new highs for the year. All are in “supply-driven bull markets right now,” according to Paul Caruso, Ancora’s director of commodities investments.
The S&P GSCI Softs index, a sub-index of the S&P GSCI commodities index that solely tracks soft commodities, has risen by more than 18% this year.
Orange juice prices have risen due to a short worldwide citrus supply and storms that devastated Florida last autumn, the key supplier of orange juice for the United States. Due to rising temperatures making harvesting more difficult, major exporters such as Brazil and Mexico have also reduced their expected orange crop yields for the year.
This month, the juice futures market set a new high of $3.50 per pound. Live cattle futures also set a new high, reaching $1.9205 a pound.
Meat prices have been driven up by diminishing cow herds in the United States, increased beef demand, and rising labor and fuel expenses. Earlier this year, a lengthy drought in the Midwest devastated grasslands and hay harvests, causing some farmers to reduce their herds. According to USDA data, supplies are expected to decline this year and next, and perhaps into 2025 and 2026, before being replenished.
Not only has breakfast and lunch become more costly, but so has dessert.
Prices for raw sugar and cocoa have risen dramatically in recent months. Sugar futures hit 27.62 cents per pound this week, the highest level since 2012, while cocoa futures hit $3,763 per metric ton this month, the highest level in almost a decade.
Sugar prices rose early this year as increased demand coincided with crop revisions from key producing countries such as India and Thailand as a result of inclement weather. After Brazil, India is the world’s second largest producer of sugar.
“Soft commodities in particular are very fragile and sensitive to weather change,” which can hamper production, according to Darwei Kung, DWS’s director of commodities and natural resources. “That’s why prices are rising, and there’s no quick fix because there’s only so much people can produce.” And that is less susceptible to demand than it is to output.”
Kung said that because food and energy are not included in core inflation estimates, customers may face higher daily prices than those considered by central bank authorities. This might result in a “bifurcation” of viewpoints on inflation that is more difficult for consumers, at least in the near term, he warned.
Customers are suffering the brunt of increasing pricing as the world’s leading food businesses attempt to pass on rising input costs.
“It’s clearly not the time to speak about deflation [or] price decreases because of the considerable fall in gross margin that we’ve witnessed…”We continue to see a high level of input cost inflation,” Nestlé’s chief financial officer François-Xavier Roger said earlier this month at the Barclays Consumer Staples Conference.
The Nestlé CEO mentioned rising prices for sugar, cocoa, and Robusta beans for coffee, but said, “obviously, some other items have declined like energy, like transportation, but net-net, still a few billions up in terms of input cost inflation in 2023.”
Unilever’s chief financial officer Grame David Pitkethly also stated at the Barclays conference that the firm — which manufactures Ben & Jerry’s, Magnum, and Breyers ice cream — is still experiencing inflation in its nutrition and ice cream sectors. Unilever recorded a 12.6% increase in “underlying prices” in nutrition and 11.5% in ice cream in late July, the latter being Unilever’s most discretionary category where “private label is attractive to the consumer,” according to Pitkethly.
“We’ve got lots and lots of inflation and pricing…the consumer feels that pricing,” the chief financial officer stated.
Other agricultural commodities, such as corn and wheat, have declined from their highs earlier this year, brightening the consumer outlook.
Last week, benchmark soybean futures slid to a one-month low after the USDA announced lower-than-expected soy export sales. Corn and wheat reached year-to-date highs in January and February, but have subsequently declined.
Some economists believe that rising interest rates and weaker economic growth will dampen consumer appetites.
“I believe volatility will continue as we learn more about the harvest, but as important as the harvest is, it’s all about understanding demand,” said Jeff Kilburg, founder and CEO of KKM Financial.