Commodity price inflation is front-page news, which might mean a correction is imminent.
Longer term, higher commodity prices may lead to more investment into production after a decade of neglect.
Rising interest rates could make commodity financing harder to secure and manage.

Yellen: Rate Increase Ahead…Maybe…Maybe Not

Last Tuesday, the US Treasury Secretary, Janet Yellen, hinted that rising prices might lead to an increase in interest rates.

This was the first time a major American official has mentioned raising interest rates since COVID began.

Many other commodity countries around the world have already been increasing interest rates.

Even more bizarrely, just hours after hinting at rate rises, Janet Yellen backtracked.

There’s a strong chance the messy communications we’ve seen in the past week continue, with implications for the commodity markets, including sugar.

Biden: No Easy Decisions

The American government wants continued economic growth and one of the tools they’ve used repeatedly since the 2008 crisis has been financial stimulus.

This process reached new extremes during the COVID crisis; the Government went as far as deferring taxes and giving cash handouts/stimulus cheques.
A further tool used by the Federal Reserve to ensure continued stimulus is low interest rates.

However, another remit of the Federal Reserve is to control inflation and the traditional way to do this is to raise interest rates.
The authorities have difficult decisions to make – holding rates low may risk strong inflation, which ultimately hurts consumers.
Some of the world’s largest companies have already said they’ll need to increase prices in the future to pass costs through to the consumer.

But raising rates increases the cost of money, reducing access to credit.
This puts pressure on consumers seeking to refinance mortgages or those with other forms of debt.

It also risks ruining a stock market boom fuelled in part by access to cheap capital, hence the mixed messages of the last week.

Short Term Impact on Commodity Markets: Correction Ahead?

The message from the Federal Reserve itself has been that any inflation will likely be transitory.
This sounds ridiculous if you glance at the corn or lumber markets (it turns out money does grow on trees if you own a chainsaw).

But in the short term, the Federal Reserve is probably correct; global commodity markets are starting to look over-extended.
For a start, there’s now widespread media attention on inflation.

Investors and the public are aware too.

Speculators are heavily long many commodity markets: in sugar’s case, unsustainably long.

It’s possibly time for a correction lower.

Long Term Impact on Commodity Markets: Infrastructure Boom

The classic policymaker response to a crisis is to invest in infrastructure.
The 1929-1933 depression in the USA was followed by Roosevelt’s huge infrastructure spending plans, The New Deal, building the Lincoln Tunnel and LaGuardia Airport among other projects.

After the 1939-1945 war, Europe was rebuilt through vast infrastructure building, supported by the USA and the Marshall Plan.
For COVID it will be the same – the Biden administration has already outlined a $2t eight-year plan to improve infrastructure and move to greener energy.

This could be positive in the longer term for many commodities.
As well as encouraging greater mobility and prosperity, governments around the world will probably try to do so in a low or zero carbon fashion.
This is where sugar, as an energy crop, could benefit; for example, look at the Indian government’s ambition to move to E20 by 2025.

We’re also positive on sugar prices because none of the world’s top ten sugar producers are increasing output, while demand for sucrose is still growing.

This will all have a profound impact on commodity businesses.
Higher prices could lead to fresh investment in production capacity – for example, new cane acreage in CS Brazil in the sugar world.
But higher interest rates could mean alternative financing arrangements could become increasingly important for the industry, especially given the recent withdrawal of many major banks from the commodity finance sector.
Carrying stock in a high flat price and high interest rate environment could be a challenge for many commodity businesses.
In short, managing supply chains effectively could be increasingly difficult in the future for commodity producers, traders and end-users alike.

Explainers You Might Be Interested In…

Stephen Geldart

Stephen joined CZ in 2008 and leads the Analysis Team, who provide leading-edge coverage of the sugar, ethanol, ingredients and packaging markets primarily on Czapp.com, CZ’s online portal. CZ’s analysis team also provide price risk management services for sugar producers, refiners and consumers, and regularly undertakes strategic consultancy work for energy majors, banks, and agricultural businesses. Before joining CZ, Stephen began his career in the oil refining industry. He holds an MSci in Chemistry from Imperial College London.