So far, the year 2014 is marked by adjustments in forecasts for commodities demand and prices on the global market. The primary example is coffee. Due to severe drought in Brazil, weak coffee production is expected to result in a shortage of coffee on the international market. Uncertainty about the extent of the shortage has pushed coffee prices up by about 65 percent since the end of 2013. Meanwhile, Brazil's reduced arabica output cannot be replaced by Indonesia's robusta coffee due to high rainfall in the archipelago.
The case of palm oil is similar. Until the autumn of 2013, conducive weather conditions in Indonesia and Malaysia (together both countries account for 90 percent of the world's palm oil production) optimized palm oil production, while increasing stockpiles in China and India implied that the market for higher palm oil output declined. As a result, palm oil prices fell over 40 percent between March 2012 and July 2013. However, in the last six months, the palm oil price increased by 25 percent as production rates in both Indonesia and Malaysia declined. Malaysia's palm oil production in February 2014 fell 15.3 percent to 1.28 million (while exports reached 1.35 million in the same month). Moreover, domestic consumption of palm oil increased causing lower stockpiles in Malaysia.
Another concern is the possible new El Niño cycle (periodical warm ocean water temperatures off the western coast of South America that can cause climatic changes across the Pacific Ocean). El Niño is a well known weather phenomenon which - on average - occurs once every five years. However, its impact on the weather, harvests and the world varies; it can pass almost unnoticeable (such as in 2010) or it can be felt worldwide through an acceleration of commodity prices. In the previous cycle, palm oil production declined 17 percent. Climatologists claim (based on temperature measurements) that there is a 50 percent chance of a new El Niño cycle in 2014-2015.
Cacao can also be affected by the possible new El Niño cycle as Ivory Coast and Ghana, which together account for half of the world's cacao production, can be hit by drought.
Hedge funds have responded by strengthening their (long) positions in agricultural commodities.