Commodities prices have been sold off heavily over the past week on worries that the global economy will slow. What does this mean for Papua New Guinea’s agricultural producers?

Green coffee beans. Credit: Mainland Holdings

Base metals, gold and soft commodities such as palm oil, cocoa and coffee were all swept up in the selling that followed comments from Federal Reserve Chairman Ben Bernanke about tapering off the central bank’s stimulus of the US economy.

But, despite the sharp reaction in financial markets, analysts say the medium-term outlook has not changed dramatically.

For Papua New Guinea’s key agricultural exports, changes in investor sentiment can have ripple effects through the commodities world, but the fundamentals of supply and demand do prevail.

‘If there is bearishness in grain and oilseed prices, that influences palm oil,’ Rabobank senior industry analyst Pawan Kumar told Business Advantage PNG. ‘But the biggest factor for palm oil is the oversupply that has been the case for the last 10 months or so.’

Palm oil stocks

Even though stock levels have declined somewhat in key producing nations such as Malaysia, which would normally help prices, palm oil prices remain flat because of expectations of another strong production cycle in the second half of this year.

Kumar said China’s stock of palm oil imports was 55% higher in May than a year ago, and Chinese imports were likely to slow as the nation buys more soybeans in coming months. The price of palm oil has slumped some 35% over the past year.

Cocoa to improve

Cocoa, another key commodity for Papua New Guinea’s farmers, should see prices improve over the rest of the year, according to Kumar.

‘Cocoa is the only commodity at the moment which is looking bullish, the reason being that demand is slightly higher than production,’ he said.

The current crop in Indonesia, which is forecast at 435,000 tonnes or just over 10% of global production, is expected to decline slightly from last year due to disease and other issues, while demand continues to rise.

Dramatic moves

The recent moves in financial markets were more dramatic than many economists expected.

‘What we are going to see is swings between euphoria and depression.’

Just as extra cash pumped into the banking system over recent years has helped to fuel recovery in stock markets and commodities prices, investors now fear that a reduction in liquidity will slam the brakes on the US economy, and lead to a wider global slowdown.

‘Don’t panic’

But the knee-jerk reaction that hit markets from Wall Street to Tokyo and Sydney may have been overdone, argues Sydney-based Westpac senior economist Justin Smirk.

‘Now is not the time to panic, because the arguments that people are using to create that panic do not gel,’ Smirk says.

‘If the U.S. economy does deteriorate, then the argument for the Fed removing liquidity is not there and I think you will find the Fed will be back in action later in the year,’ he said.

Volatility will be the norm

Smirk expects that prices for key commodities will continue to soften through the rest of 2013, with the economic slowdown in China adding to concerns.

But he says the outlook for demand and prices will improve again next year.

Rather than a long-term downtrend in commodities markets, Smirk argues that volatility will become the norm as uncertainty over the strength of recovery persists.

‘What we are going to see is swings between euphoria and depression.’