Commodity Report Spring 2021

COMMODITY REPORT SPRING 2021

Contents: - Exchange Rates - Butter / Cream - Cheese - Chicken - Pork - Shell Eggs - Tuna - Salmon - Potatoes - Durum Wheat - Biscuits - Rice - Pulses

- Dried Fruit and Nuts - Juices - Sugar - Edible Oils - Cocoa - Coffee - Non-Food - Shipping - Summary - Brexit - Outlook

Exchange Rates Overview The Pound has finally started to recover against the Euro over this last month. Current rates are around €1.16, we still have a long way to go to get to the pre-Brexit rates of €1.30 but all the signs are positive that things will keep moving upwards. However, until the Brexit deal is fully ratified by the EU it will still be a bit of a rocky ride, but further improvements should see some price related increases negated.

As expected, the pound has risen against the dollar since Joe Biden has taken office. Current rates have hit a high of around $1.42 making them the highest they have been since April 2018 but the Pound-to-Dollar exchange rate suffered another setback last week as a rout in the U.S. bond market lifted the Dollar but then lost steam again. Sterling could be set to recover its footing over the coming days before resuming its earlier climb to 1.40 and above.

This would be a big help to goods trade in Dollars. https://www.poundsterlinglive.com/usd/15105-pound-dollar-weekahead-forecast-recovering-footing-and-eyeing-return-to-1-40

Butter and Cream Despite lacklustre milk prices, butter prices are starting to move upwards. Cream is also rising and with the opening up of various sectors of the economy provisionally agreed as part of the Prime Ministers roadmap, this may put further pressure on in the way of increased demand.

The basis for rising prices on butter stems very much from Europe, where Germany and France are both seeing low milk volumes. The European butter price which was at €3700 per tonne, has already settled in some countries at €3800 for last week and reported at over €4000 this week.

This lack of milk has led many experts to suggest prices will stay at least firm for some time to come yet. That is without the demand pressure from the aforementioned market re-openings.

Cream prices have risen, not as much as butter and again there is seemingly a shortage in Europe where the equivalent cream price is around £1.55/kg, with the UK price closer to £1.40/kg at the moment.

Cheese (Cheddar and Mozzarella) The feeling on cheddar is that prices may actually move soon and the sentiment is to move upwards. This hasn’t actually happened yet but there are a few indicators as to why this is the expectation moving forward: ➢ The rising fat market in Europe will keep cheddar stable to firm ➢ Curd prices are around £2900 per tonne, cheddar is just less than £3000 per tonne, which makes cheddar look too cheap (or curd too expensive perhaps!) ➢ Cheddar has held very stable during times of much reduced demand, surely it should go up when demand comes back?

Of course, the above is all guess work. What we do know is that the market for mozzarella is on the rise and up to around £2700 per tonne and demand should grow as more outlets re-open. The argument against price rises is a potential Spring Flush and excess milk, but we won’t really know this until April/May. Farmers will be only too conscious that at the same time last year, they were pouring milk down the drain.

Coloured cheddar remains in shorter supply and therefore prices are holding much firmer.

Chicken EU Chicken prices have levelled back to late 2019 / early 2020 prices and are expected to creep up further during the next quarter and throughout the year. Feed prices are at their highest price in over 3 years and are expected to go over 25% up year on year, pushing prices up further. In addition, the cost of moving goods into the UK has increased as transport companies look to capitalise on the Brexit border issues by increasing charges. This is in addition to health certification fees and import-export costs already being felt. A salmonella issue in Poland could push buyers away from the problem factories, causing a spike in demand to others, which always brings further price pressure in the market.

Brazilian chicken pricing is down around 11% year on year, however, the last month has seen it climb back up from being 30% down at the end of 2020. The current container cost issues mean the pricing almost comes out level against 2020.

Thai chicken has seen a similar picture, they are trending a few months ahead, with prices rising back to December 2019 prices and levelling out since. Again, the added Container costs are the biggest concern for the market along with Feed prices.

Pork Global pork markets remain in a bit of a slump. Prices have picked up a little in recent weeks but still much lower than all of 2019 and most of 2020 (see graph below right). The recent upturn has been put down to Germany clearing out a backlog of pigs, where demand is now reported as barely meeting supply. Spain has also seen an upturn in demand from China, possibly boosting overall demand across the sector.

Supermarket chain Morrison's has slashed prices on many products, some as much as 50% in a bid to help the British pork sector, which has been heavily hit by reduced exports. New rules on export are believed to have contributed, with much more paperwork/checks required to make deliveries to the EU than was required before.

Shell Eggs Shell egg prices have continually risen since last year. Supermarket demand replaced the out of home market but overall demand has been volatile and some farmers have reduced flocks to compensate for this. In addition, feed prices have risen significantly.

Key components of chicken feed such as soybean meal, wheat and maize have all risen significantly in price which has led to a perfect storm for farmers. They are faced with higher feed costs, a product that once the hens start to lay then there is product produced every day no matter what and uncertain demand.

This is likely to be in place for the short to medium term as laying hens usually take around 16 weeks before they start to lay, that’s if farmers choose to increase their numbers.

Tuna Skipjack tuna prices had been falling since the end of last year and into early 2021. However, catches have been slow in both the Pacific and Atlantic Oceans, which is causing prices at origin to rebound again. The currency situation is helping with most tuna traded in Dollars. It could be argued that pricing is ‘somewhere in the middle’ at around $1200-$1300 per tonne. The range of pricing over the past 2 years has been between $950-$1600 per tonne, albeit with a weaker Pound Sterling during those times.

A free trade deal has now been signed between the UK and Ghana, which means tariff free access to tuna (as well as other exports to the UK such as bananas and cocoa beans). This was previously in place via an EU/Ghana trade deal, but does ensure that the UK receives the same duty free access as before.

Salmon Norwegian salmon prices still remain low at the moment. The market is on a slight upward trend, but as can be seen from the graph to the right, much lower than some of last years peaks. With various sectors starting to open back up for Summer, it’s possible that pricing could continue to firm but it would need demand to pick up a lot more first. Also it seems that lots of cover is in place for frozen due to the low prices, which may keep a lid on prices.

Potatoes Free market potato prices remain low. This is not unexpected as there is too much product and not enough customers to buy them. That said, things will recover, but both in the UK and the EU, expected planting areas will be down. This is because farmers may move away from what has been one of the most affected product areas throughout the pandemic.

This has eventually led to product being destined for animal feed rather than peoples tables.

There should be further news over the next 2-3 months about true planting numbers and this is likely to determine the direction that prices will go along with how the weather fares in the key growing periods.

Durum Wheat Durum wheat prices are higher year on year by about 14%. Following the increases in demand for pasta during the first lockdown, where supermarket shelves were empty, not only in the UK but North America and Europe too, prices were always expected to rise. There is no carryover of wheat and therefore this years crop prices both in Italy but also in Canada which is a huge producer of durum wheat, have meant prices for pasta have risen across all origins.

Biscuits Rising commodities, stagnant case costs & increasing product renovation.

Main drivers of input costs

Wheat Own Brand Biscuit Commodity Costs

+39% y-o-y

Commodity cost index, Jan 2018 = 100

135 125

127

Palm oil

+17%

115

y-o-y

105 95 85

Sugar

+16% y-o-y

75

Source: Nielsen, Mintec, pladis analysis

This has driven input costs for some products by up to 30%

Lowest UK crop since 1981; prices expected to remain high until next year’s harvest (Aug/Sep 21)

Renovation

Lower than anticipated production of palm oil in SE Asia; lower production of competing vegetable oils (e.g. sunflower oil) High prices mainly due to Brexit uncertainty (UK net importer). This has caused a widening of premium for UK prices over European prices

Increased resource required to develop and bring to market renovated products in line with Government requirements

Rice Rice prices increased significantly during the early stages of the pandemic, where there were some increases of 50% YOY. Prices settled down to around 12% on Thai products during the last quarter of 2020, however, this has now shot up again on concerns around shipping and harvests in Thailand and Vietnam. Prices are now averaging 40% up versus last year. See below.

The Indian market, whose prices started to drop on the back of a strong harvest, has rebounded heavily since China started trading with them again at the back of 2020. This has put more pressure on the rest of the market so firm prices are expected to continue.

Pulses The market for pulses has been rocky over the last 18 months with low harvests all around the world spiking the price in April 2020. The knock-on effect Covid-19 has had on staffing has created some harvesting issues in Q3/Q4.

Pricing across all dried pulses are generally up versus 2020, from 3% - 25% dependent on variety. Shipping rates are having an even greater impact in some of these low cost product areas.

Dried Fruit and Nuts Brazil Nuts Prices have increased since the start of 2017 and despite the weaker USD rate of late against Pound Sterling in particular, replacement prices for UK deliveries are still a good 20% higher over this period. This is in line with reports that suggest this latest new crop is 20-25% down on last year.

Coconuts The coconut market is still having a torrid time. Quarantine restrictions in the Philippines have continued to impact on staffing and factory output, at the very time that more volume is required for shipping. Strong demand for DC and coconut oil is keeping the pressure on all varieties and any stocks arriving are squeezing spot prices as the delays continue. Factories are also at reduced capacity.

Sultanas The short to medium term, sets a scene for further price increases and which could easily remain until the potential new crop volumes are more clearly assessed. While the weaker USD of late has to some extent offset this origin price realignment, the Lira has also enjoyed its own recovery after the Ministry of Finance raised interest rates from 14% to 17%. The stronger Lira means higher USD prices delivered UK.

Juices Pricing across key juice products, such as orange, apple and pineapple have all increased year on year. Orange juice prices are being driven mainly by US prices and to an extent Brazilian prices too, with very little carryover stocks and high retail demand in place, prices remain firm. Apple juice prices have risen more than Orange and this is due to a number of factors, namely less than expected production across both the EU and China. EU production for 2020/2021 was expected to be around 250,000 tonnes, but will actually likely come in below 200,000 tonnes. Farmers are also expecting to hold on to product in order to satisfy the fresh market, meaning less for juicing. There has been some positive currency related improvements recently.

Sugar Sugar prices have continued to rise by around 19% year on year. Raw beet or cane sugar delivered within the EU is commanding a price of around £324/tonne. Sugar is traded globally and the New York futures price has risen for 10 months in a row, this is the longest run since 1961. Even though there is predicted to be a surplus of sugar moving forward, the fact that diesel prices in Brazil are rising, this is leading to the World’s largest producer to seek increased sugar demand for ethanol, keep overall demand very high.

Edible Oils

Edible Oils The Edible Oils markets are arguably the most bullish of all, at the moment. Prices across major oils have continually risen since last year as can be seen from the graph on the previous page. Rapeseed, Soya and Palm are pretty interlinked and often a spike in one of those can generate the same effect in another. This will impact a good number of manufactured products moving forward. Fats and spreads along with mayonnaise are just some of the products likely to feel the impact of these high oil prices.

Rapeseed – The market was already tight globally and demand remains high, Canadian prices have hit a 12 year high now.

Soya Oil – The CBOT (Chicago Board of Trade), where soyabean oil is mostly traded, hit a 2 year high at the end of 2020 and Chinese demand remains very firm with the opening up of their economy.

Palm Oil – Production issues in Malaysia and Indonesia (flooding) has ensured prices rose by 21% between November 2020 and January 2021.

Cocoa Overall demand remains weak in the market. Demand for high quality products such as those seen in the out of home market are significantly down due to restrictions on hospitality and various lockdown measures. Prices have slid back year on year by about 5-6% which is not too significant bearing in mind the circumstances.

Interestingly the World’s largest cocoa producer, Ivory Coast, have chosen to a remove a premium on their exports which works out about £70/tonne, this has fuelled speculation of high stock levels and arguably a good crop to follow.

Despite all of this, current market prices are somewhere around the average mark, albeit certainly down from the highs of Q1 – 2020 where the London price was over £2000/tonne. Currently its around £1760/tonne. Of course currency is helping that a little.

A common caveat in many of these commodities and especially cocoa, is what happens when demand does come back and how big will that demand be? For example even in quarter 4 of 2020 the grind figures (how much the top 21 companies in the EU processed during that period) showed usage at 96% versus 2019. Many would have expected much lower than this so there could be potential for the market to turn quite quickly.

Coffee

Non-Food Prices of Ethanol jumped 50% at the start of the pandemic and then it dropped dramatically in the last quarter of 2020.

This was giving some suppliers time to rethink implementing price increases. However at the start of 2021, prices have now moved back up to early 2020 levels now and is forcing the hands of suppliers to increase pricing, this is likely to start impacting finished products very soon.

The cost of PPE at source has been flat in general with exception of pricing on vinyl gloves which is still high, due to the demand for Polyvinyl Chloride. This is sitting 38% up against what is quite a steady market historically. There are still no signs of this increase reversing in 2021. See above.

Although the cost at source has stayed relatively low on most products, the price of non food in general has or will start to increase over the next quarter for most suppliers. This is due to fact the bulk of their products come from Asia and the 400-500% increases on shipping can't be sustained at current pricing. These are now filtering through.

Shipping Shipping pricing still flying high Today’s (19th February 2021) reading of the Asia to North Europe component of the Freightos Baltic Index (FBX) is up 3.6% on the previous week, at $8,455 per 40ft, up 145% since early December and a massive 428% since the same week last year. See below graph.

Commenting on the dire market situation for shippers, Gordon Downes, CEO of digital contract platform New York Shipping Exchange, said he did not believe rates would retreat after the pandemic, “for a few years”.

“In fact, I think the industry is at the beginning of a structural upcycle,” he added. Moreover, spot shippers are obliged to pay a raft of extras, including container retention and expedited booking fees, with UK importers paying an average $2,000 per box on top – unofficially termed by some carriers as “an out port surcharge”. “Shipping lines are accepting bookings based on profitability or long-term strategic importance, and hence small– to medium–sized shippers are being sacrificed,” complained Toto Dirgantoro, chairman of the Asian Shippers’ Alliance this week.

Report Summary: Increasing • Butter • Chicken • Shell Eggs • Durum Wheat • Biscuits • Rice • Pulses • Juices • Sugar • Edible Oils • Shipping

Stable

Decreasing

• Milk • Cheese • Tuna • Salmon • Coffee

• Pork • Potatoes • Cocoa

Brexit The dust hasn’t settled yet but things are becoming clearer on what the UK / EU Trade Deal means for commodities and food items in general moving forward. They key challenges are as follows: ➢ Shipping to the UK (and from the UK) is more laborious (additional red tape) than it used to be. Businesses are requiring the use of import/export brokers which inevitably adds cost. ➢ Whilst Global shipping rates are as much related to Covid-19 as to Brexit, the additional Border Inspection Posts (BIP’s) and expectation of delays, is leading to a spike in prices, even European hauliers are wanting additional rates to deliver to the UK. ➢ Health certifications and labelling amends have not only increased costs but led to businesses to think ‘is it worth it?’, especially where smaller volumes are required.

Some of the above may change over time and become more simplified or second nature, but at the moment they are impacting costs and the ease of doing business with European partners.

Outlook The fundamental price drivers remain the commodities themselves along with currencies and the usual supply/demand balance. The short to medium term outlook even despite some currency improvements is for a reasonable level of inflation and perhaps higher than last year. Increased shipping costs as well as some real inflation driving commodities are likely to contribute to higher finished good prices, e.g. flour and fats/oils. The Crude Oil price also continues to gain pace and again this would contribute to increases across all areas of the supply chain (e.g. raw materials, packaging, deliveries etc).

COMMODITY REPORT SPRING 2021