Looking for an investment idea that’s paid off handsomely in commodities markets over the past six months? Try betting on the tropics.
Tropical forest crops constitute four of the best performers among major commodity futures since early August. Coffee (in both its more flavorsome arabica and basic robusta varieties) has more than doubled in price, as my colleague Javier Blas has written. Rubber, cocoa and palm oil are all up by more than 20% over the same period. Coconut oil, though not widely traded, is also doing well: Spot prices in Amsterdam are up about 27%.
That’s no reason to celebrate. Uniquely vulnerable to the vagaries of the weather, tropical forest crops are like canaries in the coalmine of global warming. The money being made by commodity traders right now is the flipside of the losses being shouldered by wildfire-hit homeowners in the US — a harbinger of the financial damage that climate change will wreak across the world as the century wears on.
For all that production of these crops straddles three continents, they’re largely produced in a handful of places. Just six countries — Brazil, Indonesia, Ivory Coast, Malaysia, Thailand and Vietnam — account for 87% of the world’s palm oil, 71% of rubber, 59% of cocoa beans and 55% of coffee.
With such a concentration of supply, bad weather in one region can be enough to knock the whole global market off balance. In Brazil, the worst drought in four decades has hindered the flowering of coffee plants, as well as burning rainforest and sugarcane fields, and drying up of the dams that provide two-thirds of the country’s electricity. Downpours and floods in West Africa’s cacao country and Southeast Asia’s rubber and oil palm plantations have had a similar effect, killing off buds, causing fruit to rot on the trees, and preventing farmers getting to their plantations to harvest the crop.
Those disastrous conditions across three continents are connected, and growing more so as a warming climate causes regional weather systems to link up. The La Niña cycle that has predominated for most of the past five years tends to bring dry conditions to southeastern Brazil and wet weather to West Africa and Southeast Asia, as moisture in the South Atlantic and Indian Oceans is driven eastwards.
Some of this comes with the territory of tropical agriculture. Plants in temperate latitudes and the subtropics tend to be more resilient to bad growing conditions, because they evolved to cope with seasonal swings in temperature and rainfall far more dramatic than you’ll find in the tropical rainforest belt closest to the equator.
Tropical plants, however, are far more fragile. Make the weather a degree or so hotter, and photosynthesis weakens, pests proliferate, and yields decline. One 2020 study found that 41 of 190 tropical species studied will be experiencing temperatures so warm by 2070 that their seeds will be unable to grow. Climate change represents an “existential threat” to production of tropical fruits such as bananas, mangoes and papaya, according to another study last year.
Making matters worse, all the four commodities currently experiencing surging prices are produced by trees. A Brazilian soybean farmer has some scope to factor in whether El Niño or La Niña is approaching when deciding how many hectares to sow each year, helping mitigate the impacts of the weather and rebalance the market. Tree plantations are decade-long projects, however, so there’s hardly any ability to compensate by adjusting plantings. Crops that are also grown in subtropical and temperate regions, as well as the rainforest belt (such as corn, soybeans, tea, and sugar), are similarly less exposed, and have seen little evidence of price spikes of late.
The final piece of the puzzle comes from looking at the financial conditions of the people producing them. Supply of all four is dominated by smallholders, who typically farm only a few hectares and use the commodities they grow as cash crops to supplement a meager subsistence livelihood.
As the impacts of a warming planet intensify, “climate adaptation” has become a key concept for farmers in rich countries — investing in new seed strains, better nutrients, or more sophisticated methods of water management, harvesting, and crop rotation to offset the damage being wreaked by the weather.
That all costs money, however, and there’s few people in the entire global agriculture industry with less to spare than the farmers of tropical forest crops. Smallholder farmers, after all, make up the biggest share of the 700 million worldwide living in extreme poverty of less than $2.15 per day.
Higher prices like those we’re seeing now typically spur such investment. But tropical smallholders are notoriously bad at capturing the value from their supply chains, with most of the benefit flowing to processors, traders, and the handful of global companies that sit on top.
That suggests relief is far off. If you’re hoping to take your mind off the darkening reality of climate change with snack foods, a latte, a chocolate bar or a drive in the country, you’ll be paying more for the privilege for a good while yet.
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