The global economic outlook and impact on agriculture demand:: Macquarie Research,

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The global economic outlook and
impact on agriculture demand
Feature article
 With the threat of another recession looming, we look at how agricultural
commodities tend to fare during economic downturns. We get Macquarie’s macro
economists to offer their outlook on the European, US and Chinese economies.
On the back of this, we look to see what the likely impact on agricultural demand
will be. History shows that consumption volumes have hardly ever fallen during
past downturns (supply shocks and prices being more of an influence on demand).
Only growth levels are sometimes negatively impacted. Although the outlook for
mature economies is deteriorating, the income elasticity of demand is very low for
agri/food commodities in these markets. Emerging markets tend to have higher
elasticities, but fortunately, the outlook for these economies is much more positive.
Latest market update
 Sugar: After the tumbling of investor confidence and long liquidation last week,
sugar prices staged a sharp rally this week, shooting back above 26.5c/lb.
Opportunistic buying from MENA and China has supported prices, although the
expiry of the October contract likely attracted late buying and some short covering.
The white premium should come under increasing pressure as Europe, Russia
and India start churning out white sugar. As Brazilian mills begin winding down
early for the intercrop period, the focus will switch to these origins and we expect
less support for the May contract. We still think prices will ease into mid 2012,
before rising again in H2 on renewed concerns over the Brazilian crop, which
could see only modest recovery from this season’s expected 490mt.
 Coffee: Macro risk aversion and a weakening Brazilian real has pushed NY
Arabica sharply down to 230c/lb. Cash differentials however remain firm, reflecting
growing expectations that Colombia’s crop could suffer (heavy rains will likely
hamper the progress and quality of the upcoming harvest). Dry weather concerns
have sparked fears that Brazil’s flowering for next crop could falter, although this
seems premature in our view. While it is still possible for NY futures to rally again
before the next Brazilian crop arrives (on tight physical intercrop availability),
higher robusta supplies from a record Vietnam crop could provide substitution
pressure to naturals in roasters’ blends, thus easing demand pressures.
 Cocoa: Talk of the West African upcoming main crops being larger than expected
has kept NY cocoa under pressure at $2,650/t, with the ICCO suggesting 2011/12
market may be in surplus. Although Macquarie still expects a small deficit, the
risks are for this to shrink. Supply will likely exceed expectations, due the
developing La Nina which last year aided African yields (although we note that
Indonesia will likely have another bad crop); equally grindings may be weaker than
expected, given the poor EU economic outlook.
 Cotton: Not having tumbled as much as the other softs during last week’s
commodity sell-off, cotton futures had less of a retracement to carry out this week.
Remaining stuck in a 99-105c/lb, the market continues to factor the poor
conditions of the US crop and Pakistan’s flood losses – offset by strong supply
growth elsewhere. Chinese yarn exports are down 25% year-to-date, reflecting
weak foreign demand for textiles and falling consumer confidence.
 Macquarie has been shortlisted for the Commodity Research House & Agricultural
Bank of the year categories at the forthcoming Commodity Business Awards