Is the price of your cup of freshly brewed coffee set to rise with higher bean prices? Or your glass of soya milk and must-have popcorn in the cinema for that matter, as commodity prices move higher?

Coffee has gained 17% this year due to tightening supplies from the major producing countries in Central America and Colombia. Corn prices have risen 35.4% from their one-year low while soyabeans rose 58.5%. Year-to-date, corn and soyabean futures have risen 2.9% and 25.8% respectively.

Concern over higher food prices is cropping up again as prices of agricultural commodities soar, driven by unusual weather, expectation of lower output and a weaker US dollar.

The Dow Jones-AIG Agriculture Sub-Index has been on an uptrend, rising 35.9% from the one-year low reached last December. Similarly, the Reuters/Jefferies Index, which tracks 19 commodities including grains, has risen 30.3% since its one-year low in February this year. Still, both the indices are a long way from their one-year highs.

Meanwhile, the US Dollar Index, which measures the performance of the dollar against six major currencies, fell 10.8% from its 52-week high in March this year. This year alone, it fell 2%.

A weaker greenback has made commodities more appealing as a hedge against inflation as investors buy into crude oil, precious metals, grains, cocoa and coffee beans. According to UBS AG in London, a total of US$3.1 billion (RM10.8 billion) flowed into agricultural commodity investments from March 31 to June 2.

On the supply side, the US Department of Agriculture (USDA) in its June World Agricultural Supply and Demand estimates released last Wednesday, reduced its forecast of soyabean inventories as at Aug 31 to 110 million bushels — the lowest in more than 25 years — from a May forecast of 130 million. This led to soyabeans being traded higher on the Chicago Board of Trade. The US is the largest producer and exporter of both corn and soya beans.

The USDA is forecasting soyabean global production to reach 210.9 million tonnes for the year ending Sept 30, lower than last month’s forecast of 212.8 million tonnes. Last year, a record 221.2 million tonnes were harvested. Drought in Brazil and Argentina has affected the production of soyabeans and corn.

There is now concern that the forces driving the increase in commodity prices have been speculative rather than based on fundamentals as the world economy is still in recovery mode. Also, long-term dollar weakness is not a story all will agree with.

Philip Wee, senior currency economist at DBS Bank in Singapore, thinks the greenback will be range bound over the next 12 months. He expects the ringgit to trade within 3.45 to 3.75 against the dollar.

“While we acknowledge that the underlying tone for the dollar is weak, we are not ready to subscribe to a dollar crisis at this point in time primarily because a stable exchange rate is needed to foster a recovery,” he says in a phone interview.

Wee wrote in a report last week that “owners of the world’s major currencies — the US, eurozone, Japan and China — want stable exchange rates. They do not want the US dollar to depreciate because they don’t want their currencies to strengthen”.

“What we have seen from March to June is a bottoming-out-of-crisis play that led to a reallocation of assets from bonds to equities. Normally, once the crisis bottoms out, the first phase is always the dollar losing its safe haven status. This is what we have witnessed,” he says.

He reckons the greenback will see more support in 3Q if interest rate futures market start to discount US rate hikes. Furthermore, European banks’ stress test may lead to euro weakness relative to the US dollar.

“The bottom line remains unchanged. Until China resumes appreciation of the renminbi and starts supplying liquidity in a meaningful fashion to support the global economy and world trade, we should refrain from expecting a large devaluation in the US dollar in the short term,” the report notes.

What do all these mean for Malaysia’s most important commodity — crude palm oil (CPO)?

As seen from the chart, there is a negative correlation between the two. Having said that, there are many other factors which influence the movement of CPO prices, including crude oil price, although analysts say the link between the two has weakened as doubts emerged over the viability of palm biodiesel.

Meanwhile, strong soyabean prices is good news for CPO as soya bean oil, crushed from soya beans, and CPO are rival oils that trade closely to each other. CPO futures have increased more than 40% so far this year on the back of declining stock levels in the last few months. Only in May did inventories increase, by 8.5% month on month.

However, planters are now facing the prospect of the El Nino phenomenon, which causes hot and dry weather in Southeast Asia. Such weather is detrimental to the production of fresh fruit bunches (FFB), but positive for CPO prices. In 1998, when El Nino caused rising temperatures and choking haze, CPO futures prices spiked to RM2,562 per tonne — the highest ever then.

However, it will be at least 18 months before the effects of El Nino — if its occurrence is confirmed — are seen in the fields. This is because the whole process — the growth of the flower, the determination of its sex and finally the formation of fruits — takes up to more than two years.

“At this stage, it’s too early to confirm it’s El Nino. Chances are 50/50. Perhaps the picture will get clearer by end-July or August. If a severe drought happens due to El Nino, the effect on FFB production will be evident about 18 months later,” says Roy Lim, group plantations director of Kuala Lumpur Kepong Bhd.

He adds that while the current dry weather may slow down FFB ripeness, it won’t affect its production. In fact, production is expected to pick up in 2H2009.

Lim observes that drier weather is an emerging trend at KLK’s plantation, although conditions may vary. He expects production in 2H to be the same as last year or slightly higher.

Another planter says fruit production will not be affected if the hot weather condition lasts less than two months. But if it goes beyond two months, yields will be affected.

While agricultural commodities are trending higher, they are still some way from their year-ago highs, a sign that we may yet see a repeat of food riots that took place around the world in late 2007 and early 2008. But this time around, the global economy is in a bad shape now.

This article appeared in Corporate page of The Edge Malaysia, Issue 759, June 15-21, 2009