Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
Agriculture: Growing divide between softs and grains
Ole Hansen
Head of Commodity Strategy
Summary: The extraordinary temperatures seen this year, partly due to El Niño as it continues to develop in the equatorial Pacific, has created a very volatile year across the agriculture sector. Some areas have been hurt by high temperatures and drought while others have been impacted by too much rain, but overall a clear trend has emerged with the southern hemisphere suffering a bigger disruption than the northern, and it helps explain a widening gap this year between the performance of soft commodities - such as cocoa, coffee, cotton, and sugar on one hand, and the grain and soy sector on the other.
Global Market Quick Take: Europe
Commitment of Traders: Near record gold buying drives risk of a correction
Commodities: Special edition podcast with WisdomTree
Key points in this update:
- A volatile weather year has created a sharp performance gap between grains and softs
- El Niño is growing in strength raising concerns for the Southern Hemisphere crop season
- Gains in softs being led by orange juice, cocoa and sugar
“October temperature record broken as 2023 ‘near certain’ to be warmest year” was the headline in this recent article which sited data from the EU’s climate monitor. The extraordinary temperatures seen this year have partly been due to El Niño as it continues to develop in the equatorial Pacific. A weather phenomenon, explained by NOAA here, which tends to bring rain to South America and droughts to Australia and parts of Asia, and the result has been a widening gap this year between the performance of soft commodities - such as cocoa, coffee, cotton, and sugar on one hand, and the grain and soy sector on the other.
The softs sector is so far showing a 32% year-to-date gain, while the grains sector has fallen by 14%. Despite weather scares early in the growing season and concerns about Ukraine, a bumper crop has emerged following a strong growing season across the northern hemisphere. Lower wheat, corn and soybean prices have done a great deal to reduce inflationary pressures around the world, but dark clouds may still emerge into the southern hemisphere production season with hot temperatures in Australia and too much rain in parts of South America highlighting the different impact of El Niño which may grow in strength in the coming months.
The softs sector has experienced a much more challenging year so far with many of the products being produced across regions from West Africa to India and Thailand which have been exposed to extreme temperatures and with that loss of water and production. Examples being cocoa which trades near a 44-year high with this season’s Ivory Coast port arrivals remaining well below last season’s pace while sugar has reached a 12-year high, driven by port congestions in Brazil at time where India’s crop has been hurt by dryness, leading to export restrictions from the world’s second largest shipper. Furthermore, lack of rain in October due to continued impacts of El Niño could signal the country’s production problems will extend for a second season, limiting supplies through 2025.
The sharp divide between grains and soy contracts and the softs are on clear display in the below performance table, and while the overall impact on the global economy and consumers remain relatively low given price movements so far in key stables such as rice and wheat, the risk to production from rising temperatures across the world, leading to water shortages and more volatile growing conditions can unfortunately not be ruled out.
Frozen orange juice futures top the table below after reaching a record high last month above $4 per pound, more than 3X the average price seen before 2022 when orange groves were damaged by Hurricane Ian. In addition, more consistent damage has been caused by the citrus greening disease, resulting in the USDA forecasting a production of 20.5 million boxes in the 2023/24 marketing year, down from 41.2 million boxes produced in 2021/22.
Agriculture-related companies in the S&P Commodity Producers Agribusiness Index which is tracked by the iShares Agribusiness UCITS ETF trades down around 15% on the year, and by coincidence in line with the loss seen in the above-mentioned grains index. While an investment in food commodities risks amplifying the risk of even higher prices, an investment in companies involved with the sector can instead be part of the solution, as the industry tries to optimise production methods in order to address the growing threat of climate change.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)