Over the past month, the soft commodities market hit record highs, underpinned by tighter supply and demand conditions and high levels of speculative buying. Adding to the mix is the fear about supply disruptions in major growing regions of sub-Saharan Africa and Asia. Nestor Osorio, executive director of the International Coffee Organisation (ICO), said: "Tight fundamentals tend to exacerbate speculative investment." Stephanie Garner, analyst at Sucden Cocoa, concurred: "The gains were once again fuelled by fund-buying." The rally in softs drove early March prices, hitting multi-year highs, led by cocoa at $2,719 a tonne (t), Arabica coffee $1.6635 a pound (lb), tea $3.48 a kilogram (kg) and raw sugar 14.51 cents/lb. Referring to tea, Kaison Chang, a specialist at the United Nation's Food and Agriculture Organisation, said: "It has been a hell of a jump." By contrast, average prices at Mombasa a year ago were $1.68 a kg.
The influence of fund-buying in commodities--extending to coffee and cocoa--has increased markedly amid global credit gloom and financial market turmoil as investors bailed out of traditional assets such as stocks and bonds and into the safety arena of real tangible assets.
Dan Vaught of US-based AG Edwards, said: "Cocoa has benefited from the bullish stance in commodities. We've seen quite a bit of speculative buying in there." In short, hedge funds and other large speculators have built substantial net long positions in New York and London futures markets--bets on even higher price hikes in 2008/09.
The Food and Agriculture Organisation (FAO) in Rome sees average tea prices reaching possibly record levels following a projected 10% decline in Kenya's 2008 shipments and current dry weather conditions reported in major growing regions of South Asia and Africa. The top three producers, India, Kenya and Sri Lanka--in that order--account for more than four-fifths of worldwide tea production. In fact, Kenya is the world's No.1 black tea exporter, followed by China and Sri Lanka.
Global tea exports between January and October 2007 totalled 862m kg, on FAO figures, of which Kenyan, Chinese and Sri Lankan respective shares were 27.4%, 22.2% and 22.1%. The bulk of India's tea harvest (the world's largest) is consumed by the huge domestic market, which leaves only 15% of annual output for exports.
In contrast with sustained over-production (i.e. the glut of recent years), hence weakening tea prices, the...