Macquarie :Supply-side issues to support Natural Rubber prices higher in 2011

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Macquarie Agri-view
Supply-side issues to support Natural
Rubber prices higher in 2011
Feature article
 Natural rubber prices reached new 30-year highs this week amid very tight
supply/demand fundamentals. Adverse weather conditions in Southeast Asia
have no doubt worsened the near-term supply outlook, at a time of strong
rubber demand. But there are longer-term, structural issues at play here as
well, which threatens to prolong the global supply tightness into the New Year
too. We believe high rubber prices will remain a feature for most of 2011.

Latest market update
 Cocoa futures shot up 12% last week in response to the unresolved election
results in the Ivory Coast, reaching 4-month highs of $3,048/t in NY last week.
Since then, however, prices have tumbled back lower to $2,900/t amid signs
that cocoa trade was still flowing, low incidence of violence, and suggestions
that most grinders have sufficient stock to avoid panic buying. However, the
situation remains tense as neither the president-elect nor the incumbent
president want to relinquish power and the market is on alert for any
escalation of violence from supporters of either camp. We expect upside price
risk in the short term given the heightened possibility of supply disruptions.
However, Ghana, Indonesia and other exporters will likely sell into any such
strength by maximising sales to end markets.

 NY sugar futures broke through the 30c/lb mark yesterday following a weaker
US dollar and the still-bullish fundamental backdrop. Disappointing crops in
importer countries mean that their net import demand has increased by 4mt
this season, yet export availability continues to shrink. With Brazil
experiencing rainy weather, most mills in the Centre-South have now stopped
crushing; Australian exports are now estimated at 2.2mt (down from an initial
estimate of 3mt due to rain-disrupted harvests); and South Africa’s crop has
been downgraded to 1.9mt from 2.3mt previously due to droughts. With the
downgrades, Macquarie’s forecast global sugar balance for 2010/11 has been
revised lower to a mere 0.6mt – implying the market is dangerously close to
moving into deficit and will be entering 2011 with very low stocks indeed. As
always, all eyes are on India with hopes for it to export any domestic surplus.

 Vietnam’s robusta coffee harvest is almost 70% complete now, thanks to a
return to drier weather. But that is not preventing London futures prices from
jumping higher to $1,942/t. Much of the strength is coming from NYs’ arabica
futures market, which shot past the 217c/lb mark yesterday amid benign
macro and technical factors as well as continued quality and supply concerns
of coffee coming out of Colombia and Central America. The rising coffee costs
to roasters will likely be passed on to retail customers from 2011 and should
result in slower coffee demand growth.

 Cotton has resumed its bull run to shoot past the 140c/lb mark, following a
supportive USDA report last week (US stocks were revised down 200k bales)
and China’s decision to leave interest rates unchanged this week. The market
awaits India’s export deadline to be extended this week. Without it, the global
supply situation will tighten further.