Historically high global inflation rates and supply chain disruptions have been an unwanted mainstay affecting many soft commodity markets, but could climate change pose the biggest danger yet for institutions looking to build exposure to commodities like coffee, soybean, sugar, and wheat?
According to the European Environmental Agency, climate change is projected to impact the agricultural sector in a way that can alter regional crop growing conditions and pest incidence.
While production isn’t forecasted to decline before 2050, the EEA reports that production zones will shift, annual yields will become more variable, and price volatility of agricultural commodities will grow–impacting cultivation patterns, trade, and regional markets.
What does this mean for institutional interest in soft commodities like coffee, cotton, soybean, sugar, and wheat? More uncertainty. With more price volatility anticipated, access to a broad range of transparent spot indexes with live price streaming is essential.
How individual spot indexes perform is another matter altogether. However, we can use existing data to take a more accurate look at what the future holds for a series of soft commodities and their respective market prospects:
Volatility as Demand for Coffee Increases
According to the International Coffee Organization, world coffee consumption is expected to grow by 2.2% in 2023/24 with estimates hinging on a global economic recovery taking place.
With our appetite for coffee as strong as ever, can coffee production keep up with demand? While estimates suggest that there may be a surplus of coffee produced in 2023/24, this may not be the case for much longer.
Climate change has posed fresh challenges to coffee production, and in Colombia, farmers have expressed their concerns about the vulnerability of plants to diseases like rust, brown eye spot, or borer insects.
These mitigating factors have caused production in the area to shrink by 35% in the last five years, according to the Latin American and Caribbean Fairtrade Network (CLAC).
Although shrinking production will present more problems for the soft commodity, many bullish factors can leverage rallies among Robusta and Arabica coffee futures.
Notably, the global impact of inflation and higher production costs have resulted in tighter inventories which have paved the way for supply and demand factors that can favor higher prices.
Whether climate change can continue to impact coffee supply and demand in a way that increases yields remains to be seen, but there may be some value amid the volatility for institutions to benefit from.
Copper to Take Center Stage on Road to Net Zero
Because copper is central to many energy transformation plans due to its conductivity, the metal is likely to take center stage as more firms seek to become carbon neutral.
This won’t be an easy process. After all, the copper industry accounts for around 0.2% of global greenhouse gas emissions itself, and demand is expected to double by 2050 to 50 million tonnes because of decarbonization initiatives in wind turbines, photovoltaic panels, heat pumps, electric vehicles, and other energy-efficient equipment.
Because of its invaluable role in clean energy initiatives, the International Copper Association has introduced a pathway in which copper producers are actively bringing their carbon footprint to net zero throughout the mining, smelting, refining, and recycling process.
Copper futures have already enjoyed a rally in 2024 as major smelters in China pledged to control their capacity, and the soft commodity’s invaluable role in the green energy transition is likely to thrust the metal further into the spotlight as sustainability initiatives grow.
Cotton Faces Greater Exposure to Climate Challenge
Because most cotton farmers live in developing countries and grow materials on land spanning fewer than two hectares, this soft commodity is especially vulnerable to heat, drought, floods, and wildfires caused by climate change.
Without a sufficient private sector finance barrier allowing farmers to switch to more resilient practices, the cotton industry is especially vulnerable to failing crops.
According to Forum for the Future’s 2040 Climate Risk Analysis, in some regions, cotton growing will no longer be viable by the year 2040, so how will this affect the soft commodity?
Because cotton can be grown in warm climates, global warming may see more regions become functional producers of the soft commodity in the future. This means that there may not be hikes in scarcity for the material on the same scale as other soft commodities, but more industry volatility could bring short-term opportunities for institutions moving forward.
Challenges Ahead for Soybean Futures
According to a recent study, corn and soybean yields are projected to decline by 29% and 24% respectively from their normal upward trends by the year 2100.
Crop failures and management challenges related to climate issues have seen 127 Brazilian soybean producers file for bankruptcy protection in 2023, an increase of 525% on the 20 filings over the year prior.
“It’s not surprising to have some producers in need of [bankruptcy protection], a lot of producers will have to turn to that mechanism this year whether due to management problems or crop failures. The surprise is the volume, the speed and the timing of their appearance – even before the harvest is over,” explained André Pessôa, president of Agroconsult.
Favorable weather conditions in Brazil negatively impact the performance of soybean prices due to the abundance of production. This means that the outlook for soybean futures will be more volatile based on weather conditions, but speculative traders could see prices rise as climate change poses fresh challenges for farmers.
Sugar Prices Soar on Climate Issues
With dry spells and drought in leading sugar producers like India and Thailand, the cost of sugar has already soared to its highest levels since 2011 this year, and a supply-to-demand mismatch could make the soft commodity more valuable than ever in the future.
Record highs for sugar futures, as well as cocoa and coffee, were recorded in March 2024 following the collapse of a bridge in Baltimore blocking access to its port which houses the refinery of ASR Group, the largest sugar refinery in the United States.
Although this is an example of a human catastrophe, it offers an insight into how disrupted trade can send the appetite for sugar futures higher as climate change continues to disrupt supply chains.
With global sugar consumption consistently rising, this can be an example of a soft commodity that rallies amid supply chain disruptions.
Wheat Faces Mounting Production Challenges
According to a study produced by the Friedman School of Nutrition Science and Policy, the coming years will see threats mount to the production of wheat stemming from climate change and extreme weather.
The study anticipates that heatwaves will become more frequent globally and negatively impact crop yields, with China, the world’s top wheat producer, and the United States affected.
“Climate change is causing unprecedented events globally, which could exceed critical thresholds and reduce yields, even if there is no historical precedent,” said the study authors.
“This means that we are likely underestimating climate risks to our food system. In the case of wheat, parts of the United States and China show little historical relationship between yields and temperature, but extreme temperatures are now possible that exceed critical physiological thresholds in wheat plants.”
While uneven wheat production can raise the value of the soft commodity, disruption could likely send stocks more volatile in the future, and wheat’s role as a safe haven investment option means that its price could be affected by macroeconomic or geopolitical pressures.
Fundamental Analysis Essential as Volatility Reigns
One key consideration that institutions should take into account is that the climate emergency will carry widespread implications that are likely to bring more volatility to soft commodities.
Notably, climate change could bring an intensification of geopolitical mistrust and uncertainty which may see more investors move their liquidity away from global markets and into commodities as a safe haven option.
With this in mind, long-term soft commodity futures should always be explored alongside a significant volume of fundamental analysis. Climate change will bring an age of heightened volatility to commodity markets, and only the most adaptable institutions will be capable of thriving amid the uncertainty.
