Bi-weekly Commodity Update: Corn & Coffee
This week we take a closer look at the two rather odd commodities corn and coffee. There's been a lot going on in the market since we last visited it, with changes in weather conditions and regulations coming into force causing prices to both rise and fall.
Cool corn, no popcorn
The often overlooked but oh-so-important commodity of corn has seen better times, at least in terms of prices. Not only is corn a staple on the dinner table, but it is widely used for both animal feed and fuel production. Corn is the most important grain in US chicken farming, and 94% of ethanol in the US is produced from corn, according to the US Department of Energy. The fall in prices could therefore have a ripple effect, possibly driving down prices for both meat and fuel. This is a positive signal for the world's consumers, who have been struggling with high inflation in recent years.
What is behind this seemingly sharp decline? One factor is the favourable weather in the US Midwest. The Midwest is an important place for corn production, and the US is the world's largest producer according to the United Nations intergovernmental organisation, accounting for 31% of production. Adequate rainfall and normal temperatures have led to an upward revision of the country's expected production for the 2024/25 season. The U.S. Department of Agriculture reported in July's market outlook an expected production of 17,002 million bushels for the season, up 95 million bushels from June's outlook. Increasing production has also led to rising stocks. US corn stocks are at a four-year high.
Corn prices over a five-year horizon have returned to 2019 price levels. The entire run-up during the pandemic and the period of extraordinary inflation in 2021-2023 has been wiped out. The corn price closed at 386 US Cents/Bushel on 02.08.2024. An interesting case going forward is the impact of the falling corn price on, among other things, the chicken price, the ethanol price and petrol prices as the petrol we use contains up to 10% ethanol.
EU regulations
In June 2023, the deforestation-free products regulation entered into force in the European Union. The regulation aims to reduce the EU's negative impact on deforestation internationally and restricts imports of goods that contribute to it. The new rules will enter into force at the end of 2024/beginning of 2025.
The regulation has caused turmoil in the US futures market, where a clear price discrepancy between September and subsequent December futures contracts can be seen. The difference lies in the fact that the September contract is the last contract that allows European producers to import the coffee beans in time before the new rules come into force, without having to worry about problems at customs. September's price contract was trading 4.8% higher than its December counterpart as of 08 August 2024.
The EU regulation may possibly add to the already observed rise in coffee prices also in the longer term. Tougher requirements for growers and more administrative work to ensure compliance with the regulation will in any case not help keep production costs low. The price of Arabica beans is in an upward trend seen weekly over five years. The price is above both the Moving Average (MA) 50 and 200.
Risks
This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.
Investors in the products are exposed to the risk that the Issuer or the Guarantor may not be able to meet its obligations under the products. A total loss of the invested capital is possible. The products are not subject to any deposit protection.
The value of the products can fall significantly below the purchase price due to changes in market factors, especially if the value of the underlying asset falls. The products are not capital-protected
Due to the leverage effect, there is an increased risk of loss (risk of total loss) with leverage products, e.g. Bull & Bear Certificates, Warrants and Mini Futures.
If the product currency differs from the currency of the underlying asset, the value of a product will also depend on the exchange rate between the respective currencies. As a result, the value of a product can fluctuate significantly.