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Agricultural Forecasts
Prices closer to peaking out, but
upside weather risks prevail
Key Highlights
As we forecasted in our last update on 19 January (Agricultural Forecasts:
The return of “agflation”), prices across all agricultural commodities have
continued to strengthen into 2011, following tightening fundamentals,
triggering widespread agflation around the world. The grain and oilseeds
complex outbid each other in the battle for acreage for the 2011/12 northern
hemisphere spring planting, driving prices higher, whilst simultaneously trying
to ration demand. Soft commodities reached new multi-year highs in the first
quarter on the back of extremely low stock cover, adverse weather and (in the
case of cocoa) political unrest. Looking ahead, we have diverging views
across the agri commodities, although a recurring theme we foresee is that
even if prices drift lower they will not fall sharply, due to historically low
inventories. The combined effect of our forecasts suggest that the intensity
of agflation will likely ease by next quarter, but it may take a lag of six
months before they filter down to food retail levels.
Corn still remains our top short-term bullish call, given that stocks are
perilously low and the upcoming crop in the US looks vulnerable to yield
losses given adverse weather conditions. With still resilient demand from the
livestock and ethanol sectors, there is very little margin for error. Corn prices
may need to shoot higher still in order to ration demand before we even get to
harvest stage. And the 11/12 crop may still not be large enough. While the
wheat global market is not as tight as corn, we are particularly concerned
on the European developing wheat crop, where the drought has already
caused irreversible damage. Depleted inventories there mean that European
exports may fall by 12% y/y in 2011/12; prices could follow corn higher. We
are short-term bearish for soybeans, due to ample South American
supplies and softening Chinese imports. However, into 2011/12, the global
soybean market has the potential to tighten as large-scale Chinese buying
resumes and the potential for a lower US crop as soy acres lose out to corn.
For some of the softs, we believe that prices reached their peaked early in
Q1, and the short-term outlook is neutral to moderately bearish. For sugar,
larger-than-expected Thai output and the start of the Brazilian harvest will keep
prices at bay for a while. The market is no longer in deficit, and will likely be in a
comfortable surplus in 2011/12. A similar scenario is expected for cotton,
where high prices have cut demand and encouraged production, leading
speculators to take profit ahead of a more comfortable 11/12 season. However,
prices are unlikely to collapse too much given that stock build will be minimal at
best, with the US in particular unlikely to see much of a supply recovery.
Another of our top calls last update, coffee prices reached 34-yr highs in
May. Although they have fallen sharply recently (due mainly to macro and
currency factors), we remain short-term bullish. Given our expectations of a
deficit this season, this represents a good buying opportunity, as coffee prices
could easily shoot back up. Cocoa prices will also recover from Q3 as the
global market tightens in line with lower West African production in 2011/12, as
this year’s political chaos takes it toll on Ivorian crops.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Agricultural Forecasts
Prices closer to peaking out, but
upside weather risks prevail
Key Highlights
As we forecasted in our last update on 19 January (Agricultural Forecasts:
The return of “agflation”), prices across all agricultural commodities have
continued to strengthen into 2011, following tightening fundamentals,
triggering widespread agflation around the world. The grain and oilseeds
complex outbid each other in the battle for acreage for the 2011/12 northern
hemisphere spring planting, driving prices higher, whilst simultaneously trying
to ration demand. Soft commodities reached new multi-year highs in the first
quarter on the back of extremely low stock cover, adverse weather and (in the
case of cocoa) political unrest. Looking ahead, we have diverging views
across the agri commodities, although a recurring theme we foresee is that
even if prices drift lower they will not fall sharply, due to historically low
inventories. The combined effect of our forecasts suggest that the intensity
of agflation will likely ease by next quarter, but it may take a lag of six
months before they filter down to food retail levels.
Corn still remains our top short-term bullish call, given that stocks are
perilously low and the upcoming crop in the US looks vulnerable to yield
losses given adverse weather conditions. With still resilient demand from the
livestock and ethanol sectors, there is very little margin for error. Corn prices
may need to shoot higher still in order to ration demand before we even get to
harvest stage. And the 11/12 crop may still not be large enough. While the
wheat global market is not as tight as corn, we are particularly concerned
on the European developing wheat crop, where the drought has already
caused irreversible damage. Depleted inventories there mean that European
exports may fall by 12% y/y in 2011/12; prices could follow corn higher. We
are short-term bearish for soybeans, due to ample South American
supplies and softening Chinese imports. However, into 2011/12, the global
soybean market has the potential to tighten as large-scale Chinese buying
resumes and the potential for a lower US crop as soy acres lose out to corn.
For some of the softs, we believe that prices reached their peaked early in
Q1, and the short-term outlook is neutral to moderately bearish. For sugar,
larger-than-expected Thai output and the start of the Brazilian harvest will keep
prices at bay for a while. The market is no longer in deficit, and will likely be in a
comfortable surplus in 2011/12. A similar scenario is expected for cotton,
where high prices have cut demand and encouraged production, leading
speculators to take profit ahead of a more comfortable 11/12 season. However,
prices are unlikely to collapse too much given that stock build will be minimal at
best, with the US in particular unlikely to see much of a supply recovery.
Another of our top calls last update, coffee prices reached 34-yr highs in
May. Although they have fallen sharply recently (due mainly to macro and
currency factors), we remain short-term bullish. Given our expectations of a
deficit this season, this represents a good buying opportunity, as coffee prices
could easily shoot back up. Cocoa prices will also recover from Q3 as the
global market tightens in line with lower West African production in 2011/12, as
this year’s political chaos takes it toll on Ivorian crops.
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