Hot Commodities: August 16, 2021

Hot Commodities

Food Prices, Agriculture, Japan's Carbon Credit Market, and Uganda's Burgeoning Oil Industry

[August 16th, 2021]

This week we will be looking at the rise in food prices and how the ABCD’s, the world’s largest agricultural trade houses, are profiting as a result.  We’ll also take a deeper dive into Cargill’s biggest profit in the company’s history. We report on how Brazil plans to recover from this season’s drought and frost with the plantation of over 40 million hectares for soybeans and 4.5 million hectares for corn. We will finally gain a snapshot of Uganda’s plan for its oil industry with the support of Total and Tanzania.

As Food Prices Soar, Big Agriculture Is Having A Field Day

Food prices are rising for a number of reasons that include unfavorable weather, container shortages, and demand for key staples from some of the largest economies especially, in Asia, as the Food and Agriculture (FAO) expects food imports to reach $1.9 trillion this year compared to $1.6 trillion in 2019 as reported in The Economist.

China is expected to purchase 30 million metric tons of corn this year for its animal feed requirements, up from 11 million metric tons in 2020 during the pandemic.

Soybeans and corn have seen prices increase to 56% and 68%, respectively. This has benefited the large trading houses, namely the ADM, Bunge, Cargill, Louis Dreyfus, and other large agricultural operations such as Glencore’s agriculture business Viterra, and COFCO International.

Large multinationals such as Unilever have seen prices of their key products such as Ben & Jerry’s ice cream and Hellman’s mayonnaise increase for their consumers to the highest levels in a decade due to more expensive raw materials.

In the short term, conditions are expected to remain the same with strong demand, and the FAO estimates that trade volumes will grow by 4-5% each quarter for the next year. 

Forecasts suggest prices will eventually settle for better crop-producing nations such as Brazil. Prices may also settle due to China’s grain demand for the feed industry slowing.

The ABCD’s have seen combined revenues continue at the $250 billion mark since 2019 but far below the levels of 2013 when the combined revenue reached $350 billion. However, with the opening up of the global economy from the pandemic, demand trends indicate that the global food suppliers are headed for another record period. After a bumper crop in 2020, the combined profits of the group were reported to be above $6.3 billion.

Crop Giant Cargill Reports Biggest Profit in 156-Year History

Cargill, one of the largest agricultural commodities traders and the “C” in the “ABCD’s” of global grain traders, along with ADM, Bunge, and Louis Dreyfus, has recorded its highest profitable year in its 156-year history with $4.93 billion in net income in the fiscal year of 2021 up to the end of May.

Bloomberg News reports on how the commodities behemoth saw large profits from the demand of meat, corn, and soybeans, particularly from China, and the general increase in pricing in the agricultural markets in the past 12 months. 2021’s profits were up 64% from $3 billion in 2020 and above the company’s previous record of $3.95 billion in 2008 during the decade-long super-cycle. 

The company operates in over 70 countries and has over 155,000 employees across the globe. With a 3.7% of sales to profit margin, Cargill reported $134.4 billion in sales, up from $114 billion the previous year.

Meanwhile, The Financial Times reports on how Cargill has partnered with Continental Grain to purchase US poultry producer Sanderson Farms for $4.5 billion as demand for chicken meat has increased.

Cargill and Continental Grain will control a newly combined company that will produce 15% of the US poultry meat.

Brazilian Farmers Plan To Expand Soybean Area; Protein Producers Short Of Corn Import From Argentina

Farmers in Brazil will expand the current soybean production area for the 15th consecutive year by 4% to 40.5 million hectares in the 2021/22 season with a target harvest of 144 million tons. 

According to Merco Press, this new target will surpass the current season’s estimated 136 million tons for 2020/21, with exports of 8.45 million tons recorded in July.

Corn farmers will also increase their acreage by 4% to 4.56 million hectares for the new season as demand continues to increase for cattle, pork, and chicken feed. 

Brazil has been forced to look at alternatives for corn stocks, with imports from Argentina and the US. The US is one of the options due to a 9% fall in production compared to last year’s 93 million tons.

Sugar Soars As Crops In World's Top Producer Brazil Hit By Frosts

Brazil’s drought and frosts have continued to affect several crops, including corn, coffee, and now sugar. Reports of damaged sugarcane from the world’s largest producer have emerged due to frost in June and July.

According to Reuters, Brazil’s center-south region lost 11% of sugarcane production, equivalent to 3 million tons. The industry group Unica has seen more agricultural land damaged by the worst drought in 90 years.

The drought and frost have affected both the quality of sugarcane and the expected yields for a country. This is significant because Brazil produces 40% of sugar for the global sugar trade. The unfavorable conditions may force producers to end the season early, which will directly impact global supplies.

The global benchmark for raw sugar trading, the ICE Sugar No.11 Futures contract, rose from $18.47 to $19.83 cents per pound within a 5 day period this past week.

Japan's Ministry Aims To Start Demonstrative Carbon Credit Market In FY 2022-23

Japan’s Ministry of Economy, Trade, and Industry plans to launch a demonstrative carbon credit exchange market for the fiscal year of 2022-23 as a way to monetize the push for carbon neutrality in the country.

According to S&P Global, the carbon credit exchange market will start with a trading platform for carbon credits from C02 in Japan. Further plans to include the ASEAN countries and voluntary credits from Europe and the US, where exchanges are up and running. 

This initiative is expected to send price signals to help corporations on their emission targets, and so the government will work to increase the available carbon credits. By 2030 the existing J-Credit Scheme will increase to 15 million tons for the domestic market. This will push an additional 100 million tons of carbon credits to ensure overseas operators have access to Japan’s platforms.

Uganda Pins Hopes On Burgeoning Oil Industry

Uganda and Tanzania agreed to a 1,440km oil pipeline that will run from Uganda, beside Lake Victoria, to the Port of Tanga in Tanzania and will be the world’s longest heated oil pipeline. 

According to The Financial Times, the project will also be supported by French oil giant Total, whose CEO Patrick Pouyanné has stated that the environmental and social concerns have been overstated in terms of emissions. The project will be one of Total’s most efficient on the continent, and it is expected to see the break-even point at $11 per barrel.

Analysts in Uganda argue that the investments of up to $15 billion are expected to enter the country, which could rise to $40 billion over the next 25 years.

Environmental groups have warned that the project will threaten the areas protected by wildlife and could be disastrous. Others opposed to the project have argued that the economic benefits have been overstated due to the fact that the world is now moving away from its dependency on oil. 

According to The Petroleum Authority of Uganda, The East African Crude Oil Pipeline (EACOP) project will be a 1,440km, 24-inch diameter heated and buried crude oil pipeline that will start from Hoima in Uganda to Tanga in Tanzania.

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-Editors, Ronnie Luwero and Emily Shoemaker