Coffee is the latest commodity to hit multi-year highs as Brazil drought sends prices soaring

farmer, coffee farmer, coffee grower
  • Coffee prices hit a 4.5 year high on Friday extending their rise to nearly 70% in the past year.
  • Dr. Michaela Helbing-Kuhl, an agriculture analyst at Commerzbank, says Brazil’s persistently dry weather is to blame.
  • The drought is expected to continue through August which is “not a good sign for the 2022/23 crop,” according to Dr. Helbing-Kuhl.
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Prices of arabica coffee moved above $1.60 per pound last Friday for the first time since the fall of 2016.

Coffee prices have risen nearly 70% in the past year and currently trade around $1.66 per pound.

According to Dr. Michaela Helbing-Kuhl, an agricultural analyst at Commerzbank, global coffee production has been hurt by persistently dry weather in Brazil.

Brazil’s ParanĂ¡ Basin, which is home to Minas Gerais, the country’s biggest coffee-producing state, has been hit with a drought that forecasters expect to continue through August, according to a recent commodities report from Commerzbank.

2021 was anticipated to be a strong year for Brazilian coffee producers, but many have experienced weak yields as a result of the drought.

Dr. Helbing-Kuhl said the dry weather is “not a good sign for the 2022/23 crop” either, which begins flowering in September. Protests in Columbia have also hampered the transport of Brazil’s already weak harvest.

Coffee is the latest commodity to hit multi-year highs as the global economy reopens.

From lumber to copper, commodity prices have been on the rise this past year amid record demand and supply chain disruptions brought about by the current bust to boom cycle.

Lumber futures rose as high as $1,670.50 per thousand board feet in early May, although they’ve now fallen back to $1,309. Even with the price drop, however, lumber futures are still up more than 260% in the past year.

Similarly, copper futures are up 88% since this time last year amid surging demand. Bank of America commodity strategist Michael Widmer said copper is “the new oil” in a recent note to clients and claimed it could hit $20,000 per ton due to surging demand.

Oil prices also neared 2-year highs on Monday as investors are expecting OPEC+ to confirm it will continue restricting supply at a key meeting.

Despite rising commodities prices in 2021, there are some signs of a let-up for businesses and consumers. New data from Bloomberg shows hedge funds have cut their bullish bets on commodities in recent weeks.

According to data from the US Commodity Futures Trading Commission and ICE, hedge-fund holdings in 20 of the 23 commodities tracked in the Bloomberg Commodity Index fell by the most since November this week.

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The US economy is set to fully recover to pre-COVID levels this quarter – a feat that took more than 3 years after the last financial crisis

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  • Real gross domestic product for the US economy is set to return to pre-coronavirus levels this quarter, economists say.
  • It’s a feat took more than 3 years after the last financial crisis, Commerzbank analysts said.
  • The IMF has said the scarring from COVID will be far less than after 2008 in advanced economies.
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Real gross domestic product for the US economy is likely to retake its pre-coronavirus levels this quarter, economists predict.

The measure of GDP – which provides an inflation-adjusted snapshot of overall economic value – is set for a much faster recovery than after the financial crisis that ran from 2007 to 2009, when the economy took more than three years to regain its pre-crisis size, according to economists at German lender Commerzbank.

“GDP is expected to return to pre-crisis levels as early as the current quarter,” wrote Commerzbank economists Bernd Weidensteiner and Christoph Weidensteiner in a note.

They added that US real GDP took 13 quarters to reach its pre-crisis peak following the financial crisis.

“High-frequency data show that the US economy gained noticeable momentum in March,” they said. “Corona-related restrictions are being relaxed in more and more states, and fiscal policy is pumping trillions of dollars into the economy.”

Goldman Sachs economists have a similar timeline, predicting that real GDP should be well above its pre-coronavirus level by the end of the quarter.

By the firm’s measure, real GDP stood at $19.24 trillion in the final quarter of 2019, and forecasts that it will recover to reach $19.62 trillion in the second quarter of 2021, thanks in large part to strong growth in the first and second quarters.

The US economy shrank 3.5% in 2020, marking its biggest annual contraction since World War II.

But the temporary nature of many of the coronavirus restrictions, the arrival of vaccines, and huge amounts of stimulus mean the economy is set to rapidly rebound in 2021, analysts say.

Commerzbank expects the US economy to grow 6% or more in 2021. Goldman has forecasted growth of 7.2%, more optimistic than the consensus estimate of 5.7%. Both of those estimates would put real US GDP well above its pre-coronavirus level by the end of the year.

On Tuesday, the International Monetary Fund predicted that the world’s richest economies would suffer little lasting damage from the coronavirus pandemic.

The Fund said in a major report that output is expected to be around 1% lower than it would have been by 2024 in advanced economies. That compares to a medium-term loss of output of around 10% after the financial crisis.

The IMF said the unprecedented policy response during the coronavirus crisis had “helped preserve economic relationships, cushioned household income and firms’ cash flow, and prevented amplification of the shock through the financial sector.”

However, it said the loss of output would be much bigger in developing economies, particularly in those with weaker public finances or a reliance on tourism.

Read more: We asked 5 renowned growth-fund managers for their favorite stock picks. These are the 4 that multiple managers think will crush the market going forward.

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The Turkish lira is facing an inflation spiral and its central bank may need ‘outside help’ to fight the crisis and regain foreign investors’ trust, Commerzbank says

Person counts Turkish lira bills
  • Markets are seeing a repeat of the 2018 crisis, which was also triggered by presidential policy, Commerzbank said.
  • The Turkish lira is facing the risk of a damaging inflation spiral, according to the bank.
  • Turkey’s central bank may need ‘outside help’ to fight the crisis and regain investors’ trust, the bank said.
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The Turkish lira has hit record lows this week, domestic markets are in turmoil after the surprise sacking of the head of the central bank and the currency is facing a crisis and a damaging inflation spiral, according to analysts at Commerzbank.

“The next lira crisis is upon us,” Tatha Ghose, a foreign exchange and emerging markets analyst, at Commerzbank said in a note on Tuesday.

President Recep Tayyip Erdogan installed the third central bank chief in just two years earlier in the week, firing incumbent Naci Agbal, whose approach to monetary policy had won the confidence of domestic and foreign investors alike. Agbal last week raised interest rates to 19% from 17% to head off a pickup in inflation, angering Erdogan, who has made clear he believes higher interest rates boost inflation. This contradicts traditional economic theory, which argues the reverse.

Inflation could now spiral to over 20% by the end of the year as a result, Commerzbank’s Ghose said.

“…He must truly believe that lower interest rates will solve Turkey’s current macroeconomic problems even in the short-term; otherwise it is difficult to believe that the president would risk another lira crisis already, when private sector balance sheets are reeling from a massive FX liability burden,” he said, referring to Erdogan’s macroeconomic beliefs.

“We saw similar presidential involvement in monetary policy right before the last lira crisis in 2018,” Ghose said. “This particular experiment risks ending in an FX-inflation spiral,” he added.

Whilst it is impossible to predict what form the new Turkish monetary policy will take, it is highly likely that interest rates will be cut back to around 13%, which will cause inflation to strongly accelerate in the next nine months, the Commerzbank report said.

The value of the lira against the US dollar is likely to depreciate and risks going exponential, but medium-term policies and developments are impossible to predict, Ghose wrote.

Following the firing of Agbal, investors fled the Turkish market on Monday. The benchmark Borsa Istanbul 100 index had fallen over 5% at close, but turned positive on Tuesday, similarly the lira recovered slightly. It is however still at record lows against the dollar and investors are continuing to pull funds from the Turkish market. The yield on the benchmark 10-year sovereign bond was up by more than 1 whole percentage point on the day at 19.24%, the highest since the last lira crisis in 2018.

By starting yet another cycle of unstable monetary policy, Erdogan “has thrown monetary policy credibility out of the window,” Ghose said. Even policies designed to stabilize the central bank, or rate hikes would not be enough to calm investor worries, as this cycle has repeated itself too often by now, he said.

“For the lira to stabilize, some sort of regime change, or institutional hand-over may be necessary – for example, under IMF supervision – which will restore credibility,” Ghose said.

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