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ANALYSIS: Greater liquidity and recovering demand will help prices go higher


The world is facing record cereal harvests in 2020-21 according to the UN’s Food and Agriculture Organization (FAO) - yet the same agency has now said that its food price index went up in August, for the third successive month.


In August the vegetable oil price element of the index went up by 5.9% - and is now back where it was pre-Covid-19. On Thursday this week the Bursa Malaysia Derivatives exchange saw the Novmber-dated crude palm oil (CPO) contract price settle2.85% higher at Ringgit 2,891 or $97.47 per tonne, its highest close since 23 January. Which is astonishing given the world is only now starting to emerge from its self-imposed lockdowns.


Estimates for Indonesian and Malaysian 2020 stocks (who together account for some 90% of CPO ouput) do not suggest any supply tightness. Indonesia’s Palm Oil Association (GAPKI) slashed its expectations for CPO exports this year by 18%, to 24.92m tonnes versus last year’s 30.63m tonnes, but it expects production to be 46.02m tonnes, against 47.22m tonnes last year. Meanwhile Colombia - the fourth placed tiddler after the two big Asian producers and third place Thailand) - said this week that its CPO output this year will rise by 10% year-on-year to 1.65m tonnes.


In 2021 CPO exports from Indonesia are, said GAPKI, likely to rebound strongly (given a global economic recovery) to 33-35m tonnes.


Liquidity helps drive prices


We need to lift our sights a little and provide some context.


The precipitous collapse in agricommodity prices earlier this year was prompted by Covid-19 and the oil spat between Russia and Saudi Arabia, which by the worst days of April saw the price down by more than 70% from the start of the year. The global economy appeared to have ground to a halt. Yet since that April low point crude oil prices have more than doubled and today are back to around $44 a barrel.


This recovery is not just because Russia and Saudi Arabia are no longer rattling sabres at each other - it’s also because governments around the world have collectively pumped more than $10 trillion into their economies to try to fend off a 1930s style Great Depression.


With so much fresh monetary stimulus around, interest rates generally at rock bottom, and 10-year bond yields or major sovereigns offering miserly returns, speculative investors are feeling equipped and eager to find better returns - and agricommodities provide that.


CPO is one beneficiary


CPO is a terrifically efficient crop. It can be harvested year-round, provides 35% of the world’s vegetable oil demand, on just 10% of the land. It can be used to cook with and to fuel vehicles. It has been blighted by environmental concerns, in Europe especially, that its cultivation encourages deforestation. But demand is recovering powerfully.


All boats are currently floating higher, lifted by both fundamentals and the extra liquidity in the markets. Soybean futures (a competitor with CPO) are set for their fourth successive week of gains and are close to a two-year high. We may be in for an extended period of deflation, but it doesn’t feel like that in agricommodities.

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