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For years, climate change and extreme weather events, coupled with a ballooning population, have had an impact on food production and supply globally. The lingering COVID-19 pandemic and its effect on supply chains, as well as the recent geopolitical tensions involving two of the world’s largest food producers have further exacerbated fears of a looming food crisis.

In February, the FAO Food Price Index, which tracks global food prices, jumped to an all-time high, driven by higher prices of vegetable oil, dairy, cereals and meat.

The data by the UN Food and Agriculture Organization underscored the domino effect of rising energy prices and supply chain disruptions on the entire food and beverage industry, from upstream agro-processing industries down to downstream sectors including food retailers.

Wheat prices soar to record highs

Wheat, one of the most widely grown food crop in the world, is at risk of facing a supply crunch as the war between Russia and Ukraine drags on. Both countries account for about 30% of the global wheat production.

The crisis has led to US wheat futures soaring past record levels set in 2008.  However, growers are finding it hard to cash in on the surge in prices as farm cooperatives, flour millers and exporters have stopped buying wheat harvest for future delivery over fears that they may not be able to pocket gains from reselling, according to a Reuters feature.

Failure to sell their winter wheat may prompt farmers to cut down on their spring planting, potentially leading to further shortages and elevated prices.

Coffee prices shoot up

The price of coffee, a staple for many, is also on the rise mainly due to adverse weather conditions in a number of growing countries like Brazil, as well as supply chain delays linked to the resumption of economic activities in many countries.

In 2021, Arabica coffee futures grew 76%, the largest annual jump since 2010, according to The Wall Street Journal. The increase came as Brazil, the world’s top coffee-growing country, suffered damaging frosts that followed its worst drought in 91 years, curbing coffee production. The USDA’s Foreign Agricultural Service estimates a 19% drop in Brazil’s coffee production for the fiscal year ending in June 2022.

Coffee sellers and roasters have resorted to passing on the price pressures to customers, with Nestlé (OTCMKTS:NSRGY), which sells its coffee under the Nescafé brand, hinting in October that it would increase prices this year.

US coffee giant Starbucks (NASDAQ: SBUX) also disclosed plans to further hike prices to counter rising costs.

Sugar rush intensifies

Sugar, a staple pantry ingredient, is also seeing historically high prices. Although the impact of the Ukraine war on sugar is limited as Ukraine and Russia are not major exporters of the commodity, the surge in crude oil prices are predicted to boost the demand for sugar-based ethanol, leaving less sugar for exports and for food production.

Brazil, the world’s largest sugar exporter, was recently reported by Reuters to have shipped nearly 200,000 tonnes of raw sugar to Russia as concerns of stockpiling led to stronger demand for sugar and other food staples in the country.

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The worsening oil supply shortage in the wake of the Russian invasion of Ukraine has sent pump prices to record highs in recent weeks, sparking fears of a catastrophic global oil crisis and soaring inflation.

Despite these concerns, the Organization of Petroleum Exporting Countries (OPEC) and other non-OPEC oil-exporting nations, a global oil cartel known as OPEC+, are still holding back on boosting production, downplaying the impact of the conflict on global oil supply and demand and stressing that the current market volatility is triggered only by geopolitical developments.

Why are oil prices high?

Economic sanctions imposed against Russia have caused oil importers overseas to turn down Russian oil as "no one wants to be seen buying Russian products and funding a war against the Ukrainian people,” a New York Harbor trader was quoted by Reuters as saying earlier this month.

Even when not many countries use Russian oil, pump prices have surged in recent weeks as the absence of millions of barrels of Russian oil from the global supply chain prompted importers of Russian crude like Europe to seek the commodity elsewhere such as from OPEC countries like Saudi Arabia. These leaves other traders scrambling to secure supply.

How OPEC plays into the issue

OPEC members — including Saudi Arabia, the United Arab Emirates and Venezuela — account for about 40% of the world’s crude oil production and 60% of petroleum traded globally, according to the US Energy Information Administration

In 2020, as demand for oil plummeted when most countries were under lockdown, OPEC+ agreed to a deal with former US President Donald Trump to slash nearly 10 million barrels of oil per day, or close to 10% of the global oil output. The world’s top exporters eventually started beefing up production by 400,000 barrels a day since August 2021 as economies reopened.

Most recently, with the Russia-Ukraine war threatening a global oil supply crunch, the focus has again turned to OPEC+ to ramp up output. However, the group in its recent meeting on March 2 — about a week since Russia started invading Ukraine — reaffirmed its commitment to only increase its crude oil output by 400,000 bpd.

“It was noted that current oil market fundamentals and the consensus on its outlook pointed to a well-balanced market, and that current volatility is not caused by changes in market fundamentals but by current geopolitical developments,” OPEC+ said in a statement.

UAE pushes for increased output

Yousuf Al Otaiba, the UAE's ambassador to Washington, last week said the country “favor[s] production increases and will be encouraging OPEC to consider higher production levels.” The statement caused oil prices to fall at most in two years on Thursday, with Brent crude futures falling 13.2% at $111.14 a barrel, the biggest one-day drop since April 21, 2020.

Prices have continued to fall on Monday, with Brent prices falling to $107.59 a barrel for May contracts and WTI crude slipping to $103.42 for April contracts.

Oil prices have also retreated on expectations that some producers may accelerate production.

Will OPEC+ boost output?

In late January, prior to the Ukraine conflict, the EIA had predicted a nearly 2.7 million bpd increase in OPEC’s oil output this year, the largest year-over-year jump in production since 2004.

Energy research firm Rystad Energy most recently estimated that Saudi Arabia, the UAE, Iraq and Kuwait can bring about 4 million bpd of spare capacity into the market within three to six months, potentially easing the crisis. However, that amount still falls short of Russia’s 7 million bpd in oil exports, according to Reuters.

In an interview with Bloomberg News last week, OPEC’s outgoing general secretary Mohammad Barkindo said there is "no physical shortage of oil” amid the Ukraine crisis, adding that the physical market supplies are guaranteed.

Barkindo’s statement underscores the OPEC+’s likelihood of only beefing up production once signs of a supply crunch become more imminent. One factor that could prompt the cartel to yield to calls to accelerate output is the potential for a demand destruction. Oil demand may soon peak and decline when retail fuel prices become relatively expensive and as the prices of other consumer goods skyrocket.

The transition to renewable energy sources and the shift to new-energy vehicles may also cause oil demand to weaken, especially as Western countries and other economic giants like China accelerate their climate action targets.

The potential end to the Russia-Ukraine dispute could likewise stabilize oil prices and encourage OPEC+ to boost output as global supply chains and activities resume, although the likelihood of this happening in the near term is relatively slim as Western countries have refused to directly intervene over fears of wide-ranging “consequences” from Vladimir Putin.

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allbirds stock

Allbirds (NASDAQ: BIRD), the New Zealand footwear company, was listed on the Nasdaq in November 2021 at a starting price of US $21.21 and found a range between US $20 and $30 for one month.

Its mission to create the world's first carbon-neutral shoe brand appealed to investors, perhaps those of the ESG persuasion, who have pushed a record US $650 billion of funds into ESG project in 2021. As noted by the Financial Post, Allbirds mentioned the word "sustainability" 112 times in its IPO filing.

Starting December 2021, up to the time of writing, BIRD stock has plummeted to US $5.99, and its market cap has reduced to US $4 billion from US $900 million. While the company has been performing admirably, as per its quarterly report released on February 23, BIRD's stock price has flown south for the winter, as it's caught up in the same winddown experienced by many other of its growth stock brethren.

Growth stocks fall out of favour

Over the past few months, investors have generally turned against growth stocks ever since it became apparent that the US Federal Reserve would be hiking interest rates to combat the countries inflation that is famously at a 40-year high.

Allbirds is firmly in the category of a growth stock and a unique growth stock at that, as its typically eco-conscious customers return less frequently to the Allbirds checkout aisle. This means its growth strategy and attempt to build brand awareness has to be particularly aggressive.

As such, Allbirds is ploughing its cash flow and cash reserves into gaining more customers, opening brick-and-mortar stores, and expanding its apparel range. The company is projecting revenue of US $360 million in the 2022 financial year, a big lift in revenue over 2021, but still expects to make a loss of approximately US $11 million. Interestingly, it should be noted that about US $8 million of this shortfall is attributed to compliance costs associated with becoming a public company.

Even though Allbirds may bootstrap its growth expenses with its cash flow and reserves, it does have US $40 million available under a revolving credit agreement. The cost of borrowing capital moving forward, should it need to meet its aggressive growth strategy, may become increasingly costly in line with the US Federal Reserve's interest rate hikes.

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wheat futures

Fears of the impact of Russia-Ukraine war on global inflation and recession have escalated in recent weeks and another major issue looming over the horizon are concerns that the conflict could result in a hunger crisis as both countries account for over a quarter of the world’s wheat exports.

Wheat prices recently surged to a 14-year high, with the price of a bushel of wheat soaring more than 50% to $12.94 on Monday since the Russian invasion of Ukraine began. The price movement on Monday hit the Chicago Board of Trade’s limit for another day.

Reliance on Russia and Ukraine wheat exports

Russia and Ukraine are two of the world’s largest exporters of wheat, accounting for about 30% of the global total. In 2019, Russia was the world’s top wheat exporter, while Ukraine came in fifth next to the US, Canada and France, according to data from the Observatory of Economic Complexity.

The disruption in both countries’ grain harvest and trade could have catastrophic impacts on their biggest buyers in the Middle East including Egypt, which depends on Ukraine’s wheat imports to produce subsidized bread to its poor population and other staples.

These fears intensified on Wednesday after the Ukrainian government said it will ban exports of key agricultural goods like wheat, corn, salt, meat and oilseeds to maintain market stability in Ukraine and “meet the needs of the population in critical food products.

Looming food shortage

Many nations rely on Ukraine and Russia for grain and oilseeds and the crisis could exacerbate the supply of food especially at a time when low-income countries are still reeling from the COVID-19 pandemic.

Some economists have warned that the war could lead to a repeat of the Arab Spring in the past decade when social unrest and armed rebellions led to soaring food prices.

"The fallout from Ukraine will spread across the globe. Russia and Ukraine together export 30% of the world's wheat. As this war heats up, many countries will face: soaring food prices, catastrophic hunger & growing instability,” David Beasley, the head of the United Nations World Food Program said.

Farmers in Russia and Ukraine are tipped to reduce their planting area in the coming seasons as the war intensifies, placing the pressure on other exporters to boost production.

China, India, US work to fill in the gap

Although Russia and Ukraine’s grain trade have not been technically included in sanctions imposed by Western countries, many importers have turned to other sources like China, India and the US to make up for any shortfalls, according to ING Bank, over fears of supply disruptions.

“We would expect to see strong plantings from US farmers over the spring, leaving the potential for an increase in US spring wheat, corn and soybean area,” ING’s head of commodities strategy, Warren Patterson, said in a note on Monday.

Volatility in wheat markets

The lingering crisis in Ukraine has caused wheat prices to be highly volatile in recent weeks as countries work to ensure grain imports to feed their population. The CBOT soft red winter wheat, KC hard red winter wheat and MGEX spring wheat all reached their daily trading limits for another day on Tuesday, while US wheat futures snapped a six-day winning streak the same day.

Investors have been hesitant in making big position moves for the second week in a row last week despite the market volatility, Reuters said.

In the week ended March 1, commodity funds axed only 11,000 futures and options contracts from their CBOT wheat net short, down from estimates, the news outlet reported earlier this week, citing data from the US Commodity Futures Trading Commission.

"Huge speculative interest has flowed into wheat that may have pushed futures past reasonable levels… The export market is difficult to define with many countries banning exports and tenders being canceled,” CHS Hedging was quoted by Bloomberg News as saying.

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Some interesting factors are currently affecting commodity prices. Supply chain bottlenecks, unpredictable demand from economies reopening, geo-political tensions, climate change policies are just a few examples.

I find it helpful to review the state of the commodities market periodically. In this article, we will examine Lumber, Cash Crops, and Iron Ore.

Commodity prices: Lumber

Lumber

Lumber Mills have done their best to increase timber supply in 2021, with production hitting a 13-year high to meet the unpredicted demand from new house builds and renovations. After reaching a peak of over US $1,600 per thousand board feet in May this year, Chicago Lumber Futures have retraced to US ~$640 per thousand board feet as of early November. It could be said that the psychological level of US $600 is very supportive of this commodity. November 2021, and January and March 2022 Future prices are also trading above this level.

Speculation is rife that Lumber is due for another price run-up, with Sawmills cutting production to counter the gluttonous output earlier in the year. One indicator supporting this theory is Chicago Lumber Futures increasing by just-under ~40% since plateauing in August, at one point hitting US $820 in mid-October.

Commodity prices: Cash Crops

Corn and many other grain Futures are currently trading at premiums or multi-year highs, including Wheat and Oats. As of writing, Corn, Wheat, and Oats are trading at 555 USd/Bu, 781 USd/Bu, 716 USd/Bu, respectively.

Several factors have led to inflation in grain prices. For one, we can thank (or curse) the high cost of crude oil. Due to WTI and Brent trading US ~$80 per barrel, demand for ethanol has been pushed to the extreme. It is important to note, that in the US, Ethanol is produced predominantly by fermenting Corn (25% of the Corn grown in the US is used for ethanol production).

Kluis Commodity Advisors does not believe the prices of grains is sustainable, even in the short term. The Advisors go so far as to suggest that farmers should be hitting the sell button right now to make the most of the grain rally. Butting up against this prediction are forecasts for a continuation of unfavourably dry weather, which have already put the supply of Cash Crops, including Wheat and Oats, in a precarious position.

Commodity prices: Iron Ore

Iron Ore

From mid-September until the end of October, Iron Ore appeared to have found a safe space above US $100. Now, after a steep decline beginning October 27, 2021, Iron Ore has started to test May 2020 lows, close to US $90 per metric tonne. The commodity is grating against predictions by ANZ Bank (ASX: ANZ) for it to “find a floor around current levels”.

Demand (or lack thereof) from China is what has driven the price of Iron Ore sub-100 dollars. Chinese authorities have ordered its steel manufacturers (large consumers of Iron Ore) to cut production to meet targets to reduce energy consumption and pollution across its provinces. China’s production restrictions are scheduled to last until mid-March 2022.

According to S&P Global, Iron Ore outlook is unfavourable, with “pricing risk is to the downside” as supply tends to increase in the latter half of the year.