Rising Soft Commodity Prices Add to Consumer Concerns

Surging prices for soft commodities, ranging from orange juice to live cattle, are further complicating the inflation scenario.

Numerous agricultural commodities have experienced substantial increases in recent months, largely driven by weather-related damage and escalating climate-related risks worldwide, leading to tighter supplies. These elevated prices are exacerbating the financial strain on consumers at a time when persistent core inflation, excluding food and energy, stood at 4.3% in August.

Futures contracts for orange juice, live cattle, raw sugar, and cocoa have all reached their highest points of the year this month. All of these commodities are currently in "supply-driven bull markets," as noted by Paul Caruso, the director of commodity investments at Ancora.

The S&P GSCI Softs index, a sub-index of the S&P GSCI commodities index that exclusively measures soft commodities, has surged by over 18% year-to-date.

The price of orange juice has spiked due to a shortage in global citrus supplies, compounded by last year's hurricanes that struck Florida, a primary U.S. orange juice producer. Major exporters like Brazil and Mexico have also lowered their estimated orange crop yields for the year due to warmer temperatures, making harvests more challenging.

In the juice futures market, prices reached a historic high of $3.50 per pound this month. Live cattle futures followed suit, setting a record at $1.9205 per pound.

Meat prices have been driven by diminishing U.S. cattle herds, sustained beef demand, and rising input costs for labor and fuel. A prolonged Midwest drought earlier this year damaged grasslands and hay crops, forcing some farmers to reduce their herds. Data from the U.S. Department of Agriculture anticipates declining supplies this year and next, potentially extending through 2025 and 2026 before supplies recover.

The cost of food isn't the only thing increasing; dessert prices are on the rise as well.

Raw sugar and cocoa prices have soared in recent months. Sugar futures reached 27.62 cents per pound last week, the highest since 2012, while cocoa futures reached $3,763 per metric ton this month, the highest level in over a decade.

Sugar prices spiked earlier this year due to growing demand and downward revisions in crop forecasts from key producing countries like India and Thailand, caused by extreme weather events. India, for example, is the world's second-largest sugar producer after Brazil.

"Soft commodities, in particular, are very susceptible to changes in weather, which can disrupt production," stated Darwei Kung, Head of Commodities and Natural Resources at DWS. "That's why we're witnessing price increases, and there's no immediate solution because there's a limit to what people can produce. This is more sensitive to production than demand."

Kung added that since food and energy are excluded from core inflation calculations, consumers may be experiencing higher daily prices than central bank policymakers acknowledge. This could lead to a "bifurcation" of perspectives on inflation that is more challenging for consumers, at least in the short term.

Shoppers are feeling the pinch of higher prices as major food companies attempt to pass on their rising input costs.

"It's definitely not the time to talk about deflation or price reductions due to the significant decrease in gross margins. We still see a high level of input cost inflation," said Nestlé's Chief Financial Officer, François-Xavier Roger, at the Barclays Consumer Staples Conference earlier this month. Roger highlighted increased costs for sugar, cocoa, and Robusta coffee beans, adding, "Obviously, some other items have declined, such as energy and transportation, but overall, we still see a significant increase in input cost inflation in 2023."

Unilever's Chief Financial Officer, Grame David Pitkethly, echoed similar sentiments at the Barclays conference, noting that the company, known for brands like Ben & Jerry's, Magnum, and Breyers ice cream, is still grappling with inflation in its nutrition and ice cream categories. In late July, Unilever reported a 12.6% rise in "underlying prices" within nutrition and 11.5% within ice cream, the latter being Unilever's most discretionary category, where "private label is attractive to the consumer," Pitkethly explained.

"We've seen a lot of inflation and pricing... the consumer is certainly feeling that," remarked the CFO.

It's worth noting that prices of other agricultural commodities, such as corn and wheat, have retreated from their earlier-year highs, offering some relief to consumers.