Commodity price observatory 3/2015

28 October 2015 Off By Pastaria

Pastaria’s four-monthly feature on the prices of the main raw materials used by pasta manufacturers.

by Centro studi economici Pastaria

On international trading floors food ingredients are confirming the negative trend of recent months while at the same time showing greater volatility linked to certain commodity prices. With this sense of perspective, a more discontinuous pattern of trends might emerge, also in the short term. But the trend, the underlying one at least, should continue to be downward, improving, through a further reduction in production costs, the operating conditions of companies.

There have been a few surprises due to this summer’s exceptional weather conditions with the intense heat wave which affected most of the northern hemisphere; conditions which triggered an unexpected surge in prices on the durum wheat market (and consequently of semolina), the basic food ingredient for the pasta industry. After an initial flare that had people fearing the worst, even in Italy where the new harvests failed to meet expectations in terms of quantities, prices have reversed direction, halting the upward price spiral which could have projected prices towards a physiological threshold of € 400/ton.

This didn’t happen, with the official prices fixed in Foggia, the benchmark market in Italy, standing at below €340. This is still, however, a price nearing the “danger level” according to pasta makers who, in their relations with large-scale distribution, fear a further narrowing of margins at a time, moreover, of prolonged weakness in end consumption and a gradual slowing down in exports.

Even the fundamentals are worrying: this year the durum wheat market opens already penalized by stockpiles which are way lower than the historical average. With just over 5 million tons of stored wheat, according to analysts this year the stock-to-use ratio will not reach 15%, a truly low level if one considers that it usually stands at over the 20% mark. In particular, it is not clear what the outcome of the Canadian harvests will be (Ottawa is the world’s biggest producer and exporter), with undoubtedly heavy losses due to an exceptionally hot and dry July. On the other hand, in the USA a much more favourable picture is emerging, with quality and yields showing marked improvement along with prospects of sustained growth compared to last year. The outcome of European harvests is a mixed bag, disappointing in Italy, as already mentioned, and lower than expected in both France and Spain.

The downward cycle in agricultural markets, which incorporates above all the retracement experienced in both the milk-dairy sector and the meat sector, (but this could go the other way if at the end of the year El Niño brings the climatic changes envisaged by the meteorologists), falls into a negative wake which has for some time now been common to all the main industrial commodities, from metals to energy products. August underlined a phenomenon which had already taken on quite clear characteristics at the beginning of summer. More recently other events have complicated the situation, such as the bursting of the Chinese financial bubble, which could lead to a more drastic slowdown of the Chinese economy, and the turbulence in the money markets which is creating problems particularly for emerging counties (including Russia), already badly hit by the collapse in prices for raw materials which they traditionally export.

The deflationary conditions of the commodity markets have in the meantime dragged the price of North Sea oil to below 45 dollars/barrel while Texas reference prices are below the 40 dollar mark.

On the other hand, the brusque stop in Chinese imports (moreover associated with a supply exceeding demand and the prospect of a further increase in the production of crude oil as drilling picks up in Iran) has already triggered a chain reaction across international markets. The same demand vacuum led to the collapse in dairy commodity prices. And there are no signs of improvements in the short term, apart from the odd sporadic exception, with now more tangible prospects (and risks) of a tightening on the global economy.

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