The soft commodity market is in crisis. Spiraling prices and huge oversupply in the market mean that many producers are not able to turn in a profit, small holding farmers in particular, who make up the bulk of production. Unfortunately, this is causing supply to increase further as farmers plant more in an attempt to increase their yield.
The oversupply in the market goes back several years to when the soft commodity market was booming and many farmers sought to increase their yield significantly in order to boost profits while the going was good. However, now several years later, prices have plummeted as the increased supply reaches the market.
|Commodity||Price fall from peak||Peak|
|Arabica coffee||-53%||May 2011|
Moreover, these crops have a two year yield period, meaning that unlike corn and wheat, which can be planted one year, then a different crop the next, these commodities produce crops for two years, giving farmers very little flexibility.
In particular, sugarcane, which can continue to produce a crop for three-to-four years, leaving farmers with a huge headache as the prospect of a record breaking crop from Brazil this year has sent prices plummeting.
However, this presents an opportunity.
Lower soft-commodity prices are not bad news for everyone
Lower commodity costs will be extremely beneficial for companies that buy commodities to produce their products. For example, Archer Daniels Midland Company (NYSE:ADM) is a premier supplier of cocoa to companies around the world. The company sources it’s cocoa from farming co-operatives throughout the world before processing the beans and then selling them on to food producers.
This puts Archer Daniels Midland Company (NYSE:ADM) in a very advantageous position. The falling price of cocoa will give the company wide profit margins on its products. In particular, Cocoa production reached a record during 2010-11 as farmers in the Ivory Coast sought to capitalize on record high prices. The record crop forced down prices and now, even though production has fallen, inventories around the world remain high, keeping Cocoa’s price down, which will be extremely beneficial for Archer Daniels Midland Company (NYSE:ADM) in the medium term.