Why Your Breakfast Costs 66% More Than Last Year

We make our own breakfast basket based on commodity futures contracts, along with related trade ideas.

Over the Easter weekend, we spent some time with friends in Paris. During one breakfast, we remarked on the cost of raw goods and how, even though inflation is lower now than a year ago, the baked-in price pressures are still being felt.

This got us musing (now back in London) about the rapid increase in pricing for soft commodities. Last week we flagged up cocoa and the insane move higher:

“Cocoa futures surged past $10,000 per metric ton on Tuesday, marking an unprecedented milestone and representing a remarkable 140% increase for the year. During Monday’s trading alone, futures prices escalated by $710 per metric ton, establishing a new record for the largest one-day change.”

This week, we pulled together an example Parisian breakfast, to show the rise in price of other commodities. From there, we look to explain out the reasons behind the price surges, along with some trade ideas on how to put this chat into profits.

---

Before we get into things, on Wednesday we dropped our Q1 portfolio review. We returned 10.74% on capital invested, beating our benchmark by 5.48%. To see what we bought and sold (along with our current holdings), you can subscribe here:

---

The breakfast basket

We’ve made our own breakfast basket to track prices based on our Paris breakfast of black coffee, orange juice and pain au chocolat.

The chart below shows the 12-month performance of the relevant futures contracts for this basket, namely coffee, orange juice, cocoa and wheat.

From the index benchmark of 100 a year ago, it is now tracking at 166.05. Of note is the fact that most of this gain has come since last summer.

Aside from holding our heads in our hands at the impact on our pockets of such price rises, we want to dig into what’s driving this move.

Coffee

For coffee, both the arabica futures (more of the luxury product used in cafes) and the robusta (used more for instant coffee) futures have been rallying. The extent of the surge can be seen from the below chart of the London Robusta Coffee Futures;

In the short-term, the heat wave in Vietnam is being blamed for the issues with supply. The problems in Vietnam can cause coffee prices to spike primarily because Vietnam is one of the world's largest producers and exporters of coffee, particularly of robusta beans.

The U.S. Department of Agriculture Foreign Service published content on the situation in Vietnam, with a telling excerpt below:

“Post revised Vietnam MY 2022/23 coffee production at 29.75 million bags (GBE), nearly 6 percent lower than the previous marketing year. This decline is due to an off-cycle year, high production costs, and a drop in cultivation area. Rains are forecasted 10-20 percent higher than average, supporting irrigation as well as coffee tree growth. Famers also gradually replanted coffee trees to enhance yields.”

Interestingly, we also read that due to the increasingly erratic weather, some farmers are actually switching to crops that can be produced more stably, including rubber and durian. This could further hamper supply in coming years, pushing prices up further.

Orange Juice

OJ is another commodity that has been on the rise. It’s up 33% over the past year. We note a few factors leading to this spike.

Citrus greening disease, also known as Huanglongbing (HLB), has been a major concern for orange growers in various regions, including Florida and parts of Brazil. HLB is a bacterial disease that affects citrus trees, causing them to produce smaller, lower-quality fruit and reducing overall yields. Pest infestations, such as those caused by the Asian citrus psyllid, can exacerbate the spread of citrus greening. The impact of disease and pests on orange production further reduces the available supply, contributing to price increases.

Adverse weather conditions, similar to what we flagged up for coffee is also partly to blame. These include recent hurricanes and storms in key areas of major orange-producing regions like Florida have damaged orange crops and reduced yields. Such lower production and tightening the supply of oranges available for juicing has naturally had a negative impact.

Cocoa

We don’t want to dwell on this soft too much, as we covered it in detail last week. In summary, the remarkable surge in prices is attributed to underwhelming harvests in major West African cocoa-producing countries such as Ghana and Ivory Coast, which have been adversely affected by unfavourable weather conditions and crop disease.