Agricultural Forecasts -- A bumpy ride ahead ::Macquarie Research,

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Agricultural Forecasts
A bumpy ride ahead
Highlights
 Agricultural commodities prices should continue holding up well to the bearish
global economic concerns, with the bullish influences of weather and tight
inventories having much more of an impact. As we expected in our last
update on 18 May (“Prices closer to peaking out, but upside weather risks
prevail”), with stock-to-use ratios still tight for most markets, we needed
perfect weather on top of the higher planted area to boost output enough to
solve the supply/demand imbalances.
 However, adverse weather has impacted yields this year, and markets such
as corn, sugar, wheat and coffee will remain vulnerable to further upside until
improvements in the next harvests are seen. While risk-averse speculators
may not be willing to bid prices too much higher from current levels, the threat
of another La Niña heightens the supply-side risks, and prices will likely be
volatile. Given the difficulty in rationing demand, markets will remain well
supported into 2012/13. Prices will continue to trade at historically high levels
in order to encourage producers around the world to expand agricultural
production, offering little scope to abate food inflation concerns.
Summary views
 Corn: With US yields falling to their lowest level since 2003, stocks are at
critically low levels. Prices need to remain high to ration demand and
encourage greater planting next year.
 Wheat: Higher feed demand resulting from bullish corn price movements will
dampen the bearish impact of improved supply.
 Soybeans: Neutral outlook as US production constraints are over shadowed
by heavy South American stock piles and higher palm oil production.
 Palm oil: Solid demand outlook given large discount to soy oil and inelastic
income effects will offset expanding supplies from Malaysia and Indonesia.
 Rapeseed: Europe’s production woes will once again see them dependent on
the import market; the increased seaborne demand will help keep prices
supported.
 Soy Oil & Meal: Demand for oil continues to lead crush demand higher, the
consequence being increased meal stock piles globally.
 Sugar: Short term correction as northern hemisphere crops weigh in, but
prices will rise again in H2 2012 as Brazilian cane crop problems resurface.
 Cotton: Generally easing from 2012 as supply growth amongst non-US
producers expand and demand weakens amidst soften economic growth.
 Coffee: Staying firm during intercrop period, but falling in H2 2012 after
bumper crops from Vietnam and Brazil helps the market out of its prolonged
deficit.
 Cocoa: Short term prices under pressure from large stocks following this
season’s bumper crop, but recovery expected as smaller 2011/12 crop wipes
out the surplus.