Falling prices no cause for panic
Agricultural commodity prices fell heavily during 2013. Made in PNG examines what this means for Papua New Guinea’s agricultural producers.
‘The outlook for demand and prices will improve in 2014.’
Soft commodities such as palm oil, cocoa and coffee were all swept up in the mid-2013 selling that followed comments from the United States’ Federal Reserve Chairman Ben Bernanke about tapering stimulus of the US economy. But, despite the sharp reaction in financial markets, analysts say the medium-term outlook has not changed dramatically.
For Papua New Guinea’s key agricultural exports, changes in investor sentiment can have ripple effects through the commodities world, but the fundamentals of supply and demand do prevail.
‘If there is bearishness in grain and oilseed prices, that influences palm oil,’ Rabobank senior industry analyst Pawan Kumar told Made in PNG. ‘But the biggest factor for palm oil is the oversupply that has been the case for the last 10 months or so.’
Palm oil stocks
Even though stock levels have declined somewhat in key producing nations such as Malaysia, which would normally help prices, palm oil prices remained flat because of expectations of another strong production cycle in the second half of 2013.
Kumar said China’s stock of palm oil imports was 55% higher in May 2013 than a year ago, and Chinese imports were likely to slow as the nation buys more soybeans in coming months. The price of palm oil has slumped some 35% over the past year.
Cocoa to improve
Cocoa, another key commodity for Papua New Guinea’s farmers, should see prices improve, according to Kumar.
‘Cocoa is the only commodity at the moment which is looking bullish, the reason being that demand is slightly higher than production,’ he said.
The current crop in Indonesia, which is forecast at 435,000 tonnes or just over 10% of global production, is expected to decline slightly from last year due to disease and other issues, while demand continues to rise. PNG farmers may be well placed to take advantage of higher prices, if they can address pest-related issues (see page 30). The moves in financial markets were more dramatic than many economists expected.
Just as extra cash pumped into the banking system over recent years has helped to fuel recovery in stock markets and commodities prices, investors now fear that a reduction in liquidity will slam the brakes on the US economy, and lead to a wider global slowdown.
But the knee-jerk reaction that hit markets from Wall Street to Tokyo and Sydney may have been overdone, argues Sydney-based Westpac senior economist Justin Smirk. He says the outlook for demand and prices will improve in 2014. Rather than a long-term downtrend in commodities markets, Smirk argues that volatility will become the norm as uncertainty over the strength of recovery persists.
‘What we are going to see is swings between euphoria and depression.’